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Cross-market risk contagion and portfolio diversification: a novel dynamic connectedness framework for fossil fuel and shipping markets

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  • Chen, Shuiyang
  • Meng, Bin
  • Lv, Liang

Abstract

With geopolitical tensions and global uncertainties on the rise, the transmission of shocks from energy to shipping markets has intensified, triggering a renewed and urgent interest in the energy-shipping interconnection. This paper applies a dynamic connectedness approach based on the DCC-GARCH framework to examine the relationship between oil/coal prices and their corresponding shipping route freight rates. We also construct an innovative portfolio technique focused on minimizing connectedness within the DCC-GARCH model. Furthermore, we quantify the risk contagion between these markets using the Copula-GARCH-CoVaR method. Empirical results suggest that portfolios can benefit from diversification by incorporating both oil/coal and shipping assets. Notably, the minimum connectedness portfolio technique offers substantial risk reduction and return enhancement. We identify an asymmetric risk contagion between the oil/coal and shipping markets, with risks propagating more rapidly and intensively from oil/coal markets to shipping markets. Both upside and downside risks in oil/coal and shipping assets are significantly underestimated. Additionally, deadweight tonnage and shipping route distance influence the degree of risk contagion, with larger tonnages and longer routes amplifying the transmission of oil/coal price risk to shipping freight rate.

Suggested Citation

  • Chen, Shuiyang & Meng, Bin & Lv, Liang, 2025. "Cross-market risk contagion and portfolio diversification: a novel dynamic connectedness framework for fossil fuel and shipping markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 204(C).
    • Handle: RePEc:eee:transe:v:204:y:2025:i:c:s1366554525004843
    DOI: 10.1016/j.tre.2025.104443
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