Energy market connectedness: A tale of two crises

We investigate connectedness within and across oil, coal and natural gas markets during the COVID-19 pandemic and the global energy crisis (GEC) using a time-varying parameter vector autoregression model and multiple price benchmarks. Our findings show that total connectedness spiked sharply but briefly during the pandemic and rose persistently during the GEC, reflecting crisis-specific developments that impacted demand and supply. At the aggregate level, spillover patterns varied across crises except for coal, with oil (natural gas) weakening (strengthening) as a transmitter during the pandemic, with the reverse observed during the GEC. The influence of specific benchmarks shifted in response to geopolitical events and policy interventions. We identify uncertainty, stock market dynamics, sentiment and energy market innovation as drivers of energy market connectedness. We further propose and test a trading strategy based on the strength and growth of pairwise connectedness, which yields profitable out-of-sample results. Our study contributes to the literature by offering a multi-benchmark analysis of fossil fuel market connectedness during two major crises, with the results providing insights and implications for market participants and policymakers. • We analyse oil, coal and natural gas market connectedness during COVID-19 and the GEC. • Connectedness spiked briefly during the pandemic and showed persistent increases during the GEC. • Shifts in network connectedness occurred in line with crisis-specific developments. • Uncertainty is one of the drivers of energy market connectedness. • Pairwise connectedness-based trading strategies demonstrate profitability.