Energy contagion analysis: a new perspective with application to a small petroleum economy

Mahadeo, S. M. R. ORCID: https://orcid.org/0000-0001-8576-5755, Heinlein, R. and Legrenzi, G. D. (2019) Energy contagion analysis: a new perspective with application to a small petroleum economy. Energy Economics, 80. pp. 890-903. ISSN 1873-6181 doi: 10.1016/j.eneco.2019.02.007

Abstract/Summary

We put forward the novel concept of energy contagion, i.e. a deepening of energy-finance linkages under crisis conditions in energy markets. Further, we show how to construct tests for energy contagion through correlation, co-skewness, and co-volatility channels. The samples of our contagion measures are defined in terms of calm and crisis periods in the international crude oil market. In particular, we compare how these various co-moments in the energy-finance nexus change during: (1) Oil booms and slumps using semi-parametric rule-based algorithms; (2) Tranquil and turbulent oil price volatility episodes using a non-hierarchical k-means clustering algorithm. Energy contagion analysis is essential for financial stability analysis in economies where prosperity is linked to the prices of hard commodities. Our applications are performed on the oil-exchange rate and oil-stock market relationships of the small petroleum economy of Trinidad and Tobago. The main results show a negative oil-real effective exchange rate dependency; a weak oil-stock returns association; and the existence of several energy contagion channels in both financial relationships, which are sensitive to the contemporary global financial crash.