Energy and foreign exchanges market: Mapping risk and return connectedness in developed and emerging economies

This study examines the dynamic relationships between energy and foreign exchange markets, with a focus on returns and volatility spillovers across developed and emerging market currencies. Recognizing energy commodities as central to global trade and currencies as indicators of macroeconomic stability, we examine how shocks in one market propagate to others. Using a Time-Varying Parameter VAR (TVP-VAR) model on daily data from 2014 to 2024 for four major energy benchmarks (WTI, Brent, Dutch TTF, Henry Hub) and twelve key currency pairs, we find strong and asymmetric spillovers in both returns and volatility. Emerging market currencies, such as the Polish zloty and Czech koruna, primarily transmit volatility, while WTI and Brent act as major shock sources in energy markets; natural gas benchmarks mainly absorb volatility. Return spillovers are typically short-lived, whereas volatility linkages persist and intensify during crises, notably during the COVID-19 pandemic. These findings highlight distinct return- and volatility-driven contagion channels, offering valuable insights for investors, policymakers, and risk managers in an interconnected financial landscape.