Risk connectedness and portfolios between fossil energy, new energy and environmental governance markets

This study utilizes the TVP-VAR time-frequency method and high-frequency data to analyze the complex risk spillover relationships and portfolios involving fossil energy, new energy, and environmental governance markets. The findings reveal intricate risk transmission mechanisms among these three markets, with the new energy market identified as the primary source of risk, the environmental governance market serving as a hub for risk transmission, and the fossil energy market acting as the recipient of risk. The risk decomposition results indicate that continuous and jump risks coexist between the markets. Additionally, the risk spillover effects demonstrate significant asymmetry in both upward and downward directions. Higher-order moment risk analysis reveals structural imbalances and tail risk spillovers among the markets. Frequency domain analysis shows that risk spillovers exhibit significant long-term memory. Furthermore, dynamic analysis indicates that major events, such as the U.S. withdrawal from the Paris Agreement and the COVID-19 pandemic, have profoundly impacted market risk spillovers, exacerbating the suddenness, asymmetry, and tail risk characteristics of these risks. Moreover, the portfolio constructed based on minimum connectedness demonstrates excellent returns and validates the effectiveness of hedging strategies in the new energy and environmental governance markets. This research provides strong guidance for diversification decision-making for cross-market investors.