Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 8-2023: Electricity Market Crisis in Europe and Cross Border Price Effects: A Quantile Return Connectedness Analysis

Hung Xuan Do (), Rabindra Nepal (), Son Duy Pham and Tooraj Jamasb ()
Additional contact information
Hung Xuan Do: School of Economics and Finance, Massey University
Rabindra Nepal: Faculty of Business and Law, University of Wollongong
Son Duy Pham: Finance, University of Aberdeen Business School
Tooraj Jamasb: Department of Economics, Copenhagen Business School, Postal: Copenhagen Business School, Department of Economics, Porcelaenshaven 16 A. 1. floor, DK-2000 Frederiksberg, Denmark

Abstract: Despite the massive impacts of the COVID-19 pandemic and the Russia-Ukraine war on the European energy market, little is known about their effects on the transmission of risks between member states’ electricity markets and key electricity sources. In this paper, we first employ the quantile connectedness approach to quantify the return connectedness between eleven European electricity markets, natural gas, and carbon market, then examine the impacts of the two crises on the interconnectedness. We find a significant return interconnectedness of the system, mainly driven by the spillover effects among European electricity markets. An investigation of the connectedness across quantiles shows that the spillover effects are much stronger at the tails of conditional distribution and the natural gas and carbon markets are net recipients of return shocks across quantiles. More importantly, our results reveal opposite effects of the two crises on interconnectedness. While the COVID-19 pandemic reduces the interconnectedness, the Russia-Ukraine war intensifies the return shock transmission.

Keywords: Natural gas; European Emission Allowance; Electricity markets; COVID-19; Russia-Ukraine war; Quantile connectedness

JEL-codes: D04; L94; Q43

Language: English

67 pages, June 2, 2023

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