Financial markets, energy shocks, and extreme volatility spillovers

In recent years, financial markets have experienced unprecedented uncertainties resulting from challenges such as the COVID-19 pandemic, energy shocks, and inflation mechanisms. This study investigates the interconnectedness of different financial markets (such as stocks, bonds, forex, oil, gold, and bitcoin) across extreme quantiles of volatility. To capture volatility spillovers, energy shocks, and inflation mechanisms, the study employs a novel technique called quantile-VAR, as traditional mean-based measures may not be suitable in extreme market conditions. The empirical findings indicate an increased density of networks in both the lower and upper tails of asset volatilities. Moreover, the results demonstrate an asymmetric impact of the COVID-19 outbreak, energy shocks, and inflation, with right-tail dependencies being more significant and common compared to lefttail dependencies. Additionally, the analysis of time-varying effects reveals significant shock events, ranging from the Shale Oil Crisis to the COVID-19 outbreak, including energy shocks stemming from the recent Russia-Ukraine war. These findings have important implications for investors, financial markets, fund and portfolio asset managers, and policymakers in managing risk, particularly during large shock events.