Biodiversity and energy markets: How do spillover effects across stock indices differ between the US and Europe?

The volatility of fossil fuel prices remains a persistent challenge for financial and energy markets, driven by geopolitical tensions, supply-side uncertainties, and the ongoing transition toward low-carbon economies. Moreover, the escalating climate crisis has increased interest in biodiversity conservation as a nature-based solution that may enhance economic and financial system resilience. Against this backdrop, this study examines whether biodiversity, understood as biological diversity reflected in market-based biodiversity indices, interacts with traditional energy markets and contributes to energy risk mitigation. This paper investigates the dynamic spillover effects among biodiversity indices, traditional energy assets, and oil and gas prices in the United States and Europe. Using a time-varying parameter vector autoregressive (TVP-VAR) model, the study uncovers significant interconnections between biodiversity and traditional energy indices across both regions. The results further reveal that biodiversity indices can serve as effective hedging tools, offering portfolio diversification benefits against risks in the energy, oil, and gas markets. By providing new evidence on the role of biodiversity in stabilizing energy-related investments, this study delivers actionable insights for investors seeking risk mitigation strategies and for policymakers aiming to design more resilient and sustainable energy and financial systems.