The risk spillover effect of the COVID-19 pandemic on energy sector: Evidence from China

Highlights: • We explore the risk spillover effect of the COVID-19 pandemic on Chinese energy industry. • A high-dimensional and time-varying tail event driven topological network methodology is employed. • The COVID-19 shock is a significant driving factors of intensifying the volatility of Chinese energy markets. • The risk spillover of the COVID-19 remains positive to all energy sectors in two most serious stages of the pandemic. • The risk spillover of the COVID-19 is pronounced in oil exploitation, power, gas, coal mining and petrochemical sectors. Detecting the adverse effects of major emergencies on financial markets and real economy is of great importance not only for short-term policy reactions but also for economic and financial stability. This is the lesson we learnt from the COVID-19 pandemic. This paper focuses on the risk spillover effect of the COVID-19 on Chinese energy industry using a high-dimensional and time-varying factor-augmented VAR model. The results show that the net volatility spillovers of the pandemic remain positive to all underlying energy sectors during January to June of 2020 and February to April of 2021. For the former sub-period, the volatility spillover of the COVID-19 is not only the highest, but also lasts longest for oil exploitation sector, followed by the power and gas sectors. While for the latter sub-period, the COVID-19 has relatively higher volatility spillovers to the power, coal mining and petrochemical sectors. These findings suggest that the COVID-19 has significant risk spillover effects on Chinese energy sectors, and the effects vary among different energy sub-sectors and across different periods of time.