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Systemic Risk in Energy Derivative Markets: A Graph-Theory Analysis

Delphine Lautier and Franck Raynaud

Year: 2012
Volume: Volume 33
Number: Number 3
DOI: 10.5547/01956574.33.3.8
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Abstract:
This article uses graph theory to provide novel evidence regarding market integration, a favorable condition for systemic risk to appear in. Relying on daily futures returns covering a 12-year period, we examine cross-and inter-market linkages, both within the commodity complex and between commodities and other financial assets. In such a high dimensional analysis, graph theory enables us to understand the dynamic behavior of our price system. We show that energy markets--as a whole--stand at the heart of this system. We also establish that crude oil is itself at the center of the energy complex. Further, we provide evidence that commodity markets have become more integrated over time. Keywords: Systemic risk, Energy, Derivative markets, High dimensional analysis, Graph theory, Minimum spanning trees



Systemic Risk for Financial Institutions in the Major Petroleum-based Economies: The Role of Oil

Ahmed Khalifa, Massimiliano Caporin, Michele Costola, and Shawkat Hammoudeh

Year: 2021
Volume: Volume 42
Number: Number 6
DOI: 10.5547/01956574.42.6.akha
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Abstract:
We examine the relationship between oil returns and systemic risk of financial institutions in major petroleum-based economies. By estimating ΔCoVaR, we observe the presence of remarkable increases in risk levels during the financial crises and achieve a better risk measurement when oil returns are included in the risk functions. Moreover, the estimated spread between the CoVaR without and with oil returns is absorbed in a time range that is longer than the duration of the oil shocks. This indicates that drops in oil prices which have a longer effect on risk and financial institutions require more time to account for their impact. Policy implications are also provided.



Cryptocurrency Bubble on the Systemic Risk in Global Energy Companies

Qiang Ji, Ronald D. Ripple, Dayong Zhang, and Yuqian Zhao

Year: 2022
Volume: Volume 43
Number: Special issue
DOI: 10.5547/01956574.43.SI1.qiji
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Abstract:
Financialization has brought new challenges to the international energy markets, making energy systemic risk a more complicated issue. One of the important features is the development of cryptocurrency, which has become a critical part of the global financial markets. As a consequence, the rise and fall of cryptocurrency can have nonnegligible impacts on the systemic risks in the international energy sector. This paper empirically tests this hypothesis using the equity data of the top 100 energy companies from 2014 to 2021. Specifically, we explore the extreme shocks of cryptocurrency using multiple bubble tests, and then we test to what extent bubbles in cryptocurrency markets can affect systemic risk in the energy sector. Our empirical results show that the formation of cryptocurrency bubbles, especially when the bubbles burst, significantly increases systemic risks in the energy sector. This effect retains the same in the recent COVID-19 pandemic period. In addition, oil and gas companies play an essential channel in the risk spillover from cryptocurrency markets to the international energy markets.



Systemic Risk in the Global Energy Sector: Structure, Determinants and Portfolio Management Implications

Syed Jawad Hussain Shahzad, Román Ferrer, Elie Bouri

Year: 2023
Volume: Volume 44
Number: Number 6
DOI: 10.5547/01956574.44.6.ssha
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Abstract:
We examine the dynamics of tail dependence across returns of 105 global energy firms from 26 countries covering the regions of America, Asia Pacific and Europe. A partial correlation-based approach is used to quantify the dependence structure and level of systemic risk under relatively stable and extremely bearish and bullish market conditions. The dependence network of energy stock returns is constructed based on the novel triangulated maximally filtered graph (TMFG). The results reveal a high degree of tail dependence and role played by geographical proximity. The strongest links are found under extreme bearish market conditions. American and European energy firms are more interconnected and contribute more to systemic risk than Asian-Pacific companies. The dependence intensifies during periods of market turmoil, especially during the COVID-19 pandemic. A higher instability in the dependence structure is observed during extremely bearish market circumstances. A simple portfolio trading strategy based on the dependence ranking of energy firms outperforms a naïve equally-weighted buy-and-hold portfolio strategy.





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