Navigating tail risks: The influence of geopolitical uncertainty on clean and carbon energy

This study examines the connection between geopolitical risk (GPR) and two categories of exchange-traded funds (ETFs) centered on energy. The aim is to assess how risks from wars, political conflicts, and terrorist activities influence the behavior of these financial assets. We analyze the performance of funds representing clean energy and carbon energy sectors, alongside two geopolitical risk indices, over roughly fifteen and a half years. This timeframe includes various market conditions, particularly highlighting the pandemic crisis, the Ukraine war and the continuing conflict in Palestine. By employing a quantile connectivity approach, we identified secondary effects during turbulent financial periods, especially during downturns in energy asset prices linked to shifts in the geopolitical threat index. The findings provide valuable insights into how GPR impacts energy investments and are relevant for a wide range of market participants. • Interconnectedness between clean and fossil fuel energy sectors. • Impact of Geopolitical Acts and Threats on energy sector dynamics. • Tail risk exposure during periods of heightened geopolitical volatility. • Dynamic risk transmission across different market conditions. • Insights for investors and regulators on managing geopolitical risk exposure.