Dynamic volatility dependence among fossil energy, clean energy, and metal markets: The role of climate risk or geopolitical risk

Abstract

With the growing demand for energy transition, energy and metal markets exhibit complex interdependencies, while climate risk and geopolitical risk are recognized as key factors influencing their supply, demand, and price volatility. This study explores how these substantial risks impact the linkages among fossil energy, clean energy, and metal markets. Using time-varying parameter models and the generalized variance decomposition spillover index approach, we measure the volatility dependence across the markets. Our findings indicate that the clean energy market serves as a net exporter of price shocks, while fossil energy and metal markets act as recipients. Furthermore, we demonstrate that geopolitical risks exert significantly positive impacts on market linkages, where heightened geopolitical risks notably strengthen the volatility interdependence between energy and metal prices. In contrast, climate risks only exhibit observable effects on market dependence under high-quantile scenarios. Our in-depth analysis highlights the crucial role of moderate transition-related climate risks and extreme physical risks in risk propagation among the market systems.