Fundamental spillovers or pure contagion? A disaggregated analysis of return and volatility interlinkages in the G7 oil and gas sector during crisis episodes

The study assesses the interconnectedness of returns and transmission of volatility within the Oil & Gas(O &G) market across G7 countries during three major crises viz. Oil price crisis, COVID-19 and the Russia-Ukraine conflict. The study distinguishes between fundamentals driven spillover versus pure contagion by employing three-pronged methodological approach involving the Diebold-Yilmaz (DY) spillover index, Dynamic Conditional Correlation, Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) model, and Wavelet Cross-Correlation (WCC) in contrast to existing research that primarily focuses on volatility size and directional movement, thereby contributing to the understanding of systemic risk and interconnectedness in energy-linked financial markets. The findings of the study establish that the COVID-19 crisis displayed the properties of pure contagion, portrayed by sudden, non-fundamental changes in co-movements in volatility. Conversely, economic fundamentals influenced the Oil Crisis and the Russia-Ukraine crisis. With regard to the direction of volatility, France consistently figures as a net volatility transmitter, with Japan serving as a consistent receiver during all crises, while other G7 economies display crisis-specific spillover patterns. Moreover, structural and policy factors at the domestic level are found to have significant impact on volatility transmission than external drivers. Furthermore, although regional integration is intensified by proximity, especially in the case of European countries, the cases of Canada stresses the importance of structural connections.