The Influence of Financial Stress on Dynamic Connectedness Between Fossil Energy Commodities and Green Energy Markets

Abstract

This paper aims to examine the impacts of selected stress variables, such as FSI (Financial Stress Index), VIX (Volatility Index), and EPU (Economic Policy Uncertainty), on dynamic connectedness between green markets (stocks and bonds) and fossil energy commodities. We employ the TVP-VAR model to measure connectedness and the Fourier Cumulative Granger Causality test to investigate the impacts of these stress variables on this connectedness from November 1, 2012, to November 15, 2022. The results indicate moderate return connectedness, mainly from short-term dynamics, suggesting that diversification may be more beneficial for long-term investments. We observe high connectedness during the COVID-19 pandemic. The connectedness is high among fossil energy commodities but low among green stock and bond markets, except for water company stocks. Water stocks have a significant impact on markets, followed by oil. Our causality test results indicate that the FSI and VIX impact the connectedness between them.