Asymmetric tail risk spillover and co-movement between climate risk and the international energy market

Abstract

We investigate the tail risk spillover, co-movement, and causal effect between climate risk and international energy markets using daily data from 2010 to 2022. Employing Bua et al.'s (2022) innovative measures of climate risk and various methodologies, we discover an asymmetric spillover of tail risk from climate to energy markets, emphasizing systemic tail risk contagion in extreme market conditions. Notably, climate risk primarily transmits downside tail risk in bearish states. The dynamic, negative, time-varying correlation between climate risk and energy markets is highlighted by wavelets analysis. Our study underscores that fluctuations in climate physical and transition risks can predict energy market tail risks, revealing tail risk dependence. The results also indicate a unidirectional causality from climate risks to the energy market.