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Heterogeneous effects of common volatility in energy commodity markets on the structure of inter-sectoral connectedness within the Chinese stock market

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  • Chen, Baifan
  • Huang, Jionghao
  • Tang, Lianzhou
  • Wu, Jialu
  • Xia, Xiaohua

Abstract

Understanding how volatility in energy commodity markets reshapes the return and risk dependencies among financial assets is crucial for maintaining financial stability. This study investigates the effects of common volatility in energy commodity markets (COVOE) on the network structure of inter-sectoral return connectedness within the Chinese stock market. We classify 5178 Chinese mainland-listed companies into 18 sectors and compute COVOE for these sectors, employing the global common volatility methodology. Concurrently, we construct daily sectoral composite stock price indices, weighted by market capitalization, and employ the Diebold-Yilmaz (DY) connectedness approach to measure return connectedness among them. Further, we develop a novel algorithm to remove insignificant links within inter-sectoral return connectedness networks. Results reveal that increases in common volatility in global energy, oil, and natural gas commodity markets significantly enhance the return connectedness among Chinese stock sectors, whereas rising common volatility in the coal market reduces the connectedness. Different types of energy commodity market volatility exhibit varying impacts on the net spillover of sectoral return information. Time-varying analysis suggests a declining impact of common volatility in energy commodity markets on sectoral return connectedness. Additionally, temporal and cross-sectoral heterogeneity is observed in the impact of common volatility in energy commodity markets on the net spillover of sectoral return information. The study highlights the intricate relationship between energy market volatility and the financial market, providing valuable insights for risk management and policy formulation.

Suggested Citation

  • Chen, Baifan & Huang, Jionghao & Tang, Lianzhou & Wu, Jialu & Xia, Xiaohua, 2025. "Heterogeneous effects of common volatility in energy commodity markets on the structure of inter-sectoral connectedness within the Chinese stock market," International Review of Financial Analysis, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:finana:v:102:y:2025:i:c:s1057521925002157
    DOI: 10.1016/j.irfa.2025.104128
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    JEL classification:

    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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