Dynamic risk contagion and portfolio management between China’s energy-chemical and carbon markets: A TVP-VAR-DY-based framework

This study employs the TVP-VAR-DY model to investigate the dynamic risk spillover effects between China’s energy-chemical and carbon markets. Based on the TVP-VAR-DY framework, two risk spillover effect measurement indices, named risk spillover connectedness and risk spillover influence, are constructed. Using these indices, this study explores portfolio construction from a risk spillover perspective and compares returns across different portfolios. The findings reveal that: (1) The energy-chemical market acts as a net risk spillover transmitter, whereas the carbon market mainly serves as a net risk spillover receiver. The total risk spillover between these markets demonstrates internal dependence and long-term stability, while the net risk spillover exhibits external dependence and trend coherence. (2) The risk spillover connectedness in energy-chemical markets generally surpasses that in carbon markets, and intra-market connectedness exceeds inter-market connectedness. Furthermore, major net risk spillover transmitters or receivers tend to possess greater risk spillover influence; (3) Risk spillover-based portfolios achieve superior performance. Comparatively, minimum variance-based portfolios underperform in nearly all scenarios, while portfolios constructed based on minimum risk spillover influence demonstrate optimal performance.