Geopolitical Risk and Extreme Risk Connectedness Among Energy and Other Strategic Commodities: Fresh Sight Using the High-Dimensional CoVaR Model

Abstract

Existing studies on commodity market risk spillovers recognize the pivotal role of geopolitical risk (GPR), but scarcely address how it drives tail risk spillover networks. This study adopts the Tail-Event driven NETwork methodology to explore high-dimensional Conditional Value at Risk (CoVaR) spillovers within energy and other strategic commodity markets. Our findings indicate that (1) In both lower and upper tail networks, metal and food commodities primarily act as net risk transmitters, whereas energy commodities are mainly net risk receivers. Additionally, these roles undergo short-term reversals during periods of heightened market uncertainty. (2) There exists an asymmetrical pattern of CoVaR co-movements in these commodity markets. The total connectedness (TC) in both the upper and lower tails demonstrates distinct responses to various extreme events. GPR tends to weaken the lower tail TC and strengthen the upper tail. (3) Incorporating GPR substantially improves the effectiveness of Minimum Connectedness Portfolio (MCoP) for these strategic commodities.