Systemic risk spillover of China’s energy industry based on the perspective of volatility decomposition

Abstract

[Objective] The energy industry is closely related to national security and economic development, and its systemic risks cannot be ignored. This study explored the industry-level volatility interconnections and examined the direction and characteristics of systemic risk spillover from the normal and extreme energy market states. It provides a new perspective and technical support for systemic risk management in the energy industry. [Methods] Based on the volatility decomposition approach, we decomposed the volatility risk of each energy industry into continuity and jump components, and then constructed the connection matrix and spillover indicators between these components through the generalized variance decomposition method of the vector autoregressive model. Subsequently, the systemic risk spillover effects in China’s energy industries were analyzed from static and dynamic perspectives. [Results] The empirical results suggest that: (1) There are obvious jump fluctuations in the energy industry, and the accumulation of jump risk in the energy industry will lead to an increasing systemic risk; (2) The systemic risk spillover in the energy industry is significantly time variant. The risk tends to spread outside the industry during fluctuation periods and shifts to the intra-industry contagion during the stable periods; (3) Either within or between industries, volatility risks tend to be transferred within the same type of volatility components, and the net spillover direction between two components is along the continuity-to-jump path; (4) The coal industry is the largest sender of the continuity risk, the electricity industry is the only sender of the jump risk, and the new energy industry is the largest receiver of external risk in the form of volatility jumps. [Conclusion] The government should pay more attention to both cross-industry and cross-component spillovers during turbulent periods while paying attention to the self-feedback spillover within industries during stable periods, so as to prevent local risk from accumulating and spreading to the whole energy system.

Keywords

• |energy industry|systemic risk|jump test|generalized variance decomposition|volatility risk|china