Dynamic connectedness of decomposed energy-risks shocks and the United States’ S&P 500 indexes

This study explores the relationship between decomposed oil shocks (supply, demand, and risk), geopolitical risks, and the market performance of main sectors of the S&P 500, using daily data spanning from January 5, 2015, to June 1, 2023. To examine these dynamics, a range of advanced empirical methodologies are employed, including generalized connectedness, R2 connectedness approaches, net total directional connectedness (NTDC), net pairwise directional connectedness (NPDC), wavelet quantile correlation (WQC), cross-quantileogram (CRQ), and nonparametric causality-in-quantile (NPCQ). The analysis specifically investigates the effects of oil shocks and geopolitical risks on the sector performances of energy (ENR), technology (TEC), communications (COM), financial (FIN), healthcare (HEL), materials (MAT), and real estate (RAS) sectors of the S&P 500. The sectors such as energy, technology, and communication are found to be more sensitive to global economic and trade developments, with immediate effects being more pronounced compared to delayed ones. During events such as the COVID-19 pandemic, the global economic slowdown in 2023, and the oil price decline in 2015–2016, contemporaneous effects were dominant, while uncertainties such as trade wars and interest rate hikes became more prominent post-2018, resulting in delayed impacts. Geopolitical risks generally exhibited limited effects, whereas demand and risk shocks, particularly during crisis periods like the pandemic, had stronger contemporaneous effects. Sectoral sensitivity over time indicated significant fluctuations between net transmitter and net receiver roles in response to supply and demand shocks. The energy sector played both roles, highlighting substantial variability in sectoral responses. Demand shocks were associated with strong negative correlations in the healthcare sector, while supply and risk shocks showed more complex and variable impacts. Geopolitical risks generated varying positive and negative correlations across different sectors over time, underscoring the complex nature of their influence. These findings suggest that the effects of external shocks on sectors are contingent on factors such as time, magnitude, and sector type.