Tail risk contagion across electricity markets in crisis periods

Abstract

This study examines tail risk contagion across returns series of (i) ten major electricity markets and (ii) five raw materials used for electricity production during crises, using data from 2006M07 to 2023M03. The crises covered, in the study to examine tail risk contagion, are the global financial crisis, the European debt crisis, the COVID-19 pandemic and the Russia-Ukraine war. We estimate tail risk using the Conditional Autoregressive Value at Risk (CAViaR) method and employ the quantile vector autoregression (QVAR) connectedness approach to examine the tail risk spillover. In addition, we examine the effect of uncertainty factors on tail risk spillover. The QVAR result shows significant contagion across the electricity markets during crises, particularly pronounced in extreme quantiles. We identify geopolitical risk as the substantial uncertainty factor driving the contagion across these electricity markets. The findings have significant implications for regulators in formulating policies to reduce the effect of crises and uncertainty factors.