Economic policy uncertainty and financial innovations: A perspective from spillovers in energy exchange-traded funds

Energy exchange-traded funds (ETF) are innovative energy financial product that reflects the cyclical supply and demand of energy. This paper employs the TVP-VAR-DY model to examine the dynamic volatility spillover effects within the energy ETF market in response to EPU shocks, as well as to analyze the drivers of energy ETF correlations. Using daily data from December 1, 2011 to September 1, 2023, we find a statistically significant bidirectional volatility spillover effect between EPU and the energy ETF market, with the EPU being a net recipient of volatility spillovers from the energy ETF market. In terms of the level of net spillovers, fossil fuel ETFs generally have higher net spillovers, suggesting that they act primarily as exporters of risk in the system, while clean energy ETFs behave more as net receivers. From a dynamic perspective, the volatility spillovers among energy ETFs display notable time-varying characteristics, particularly during major uncertain events such as the US-China trade war, the COVID-19 pandemic, and the Russia-Ukraine war, where systematic volatility spillovers markedly increase. Additionally, energy-related uncertainty and investor sentiment serve as key transmission pathways through which EPU influences the energy ETF market; specifically, energy-related uncertainty reduces the total spillover of energy ETFs, whereas heightened investor sentiment increases the spillover effect.