Energy Market and Carbon Emission Spillovers in Critical Minerals Investment: A Dynamic Connectedness Approach

2026-07-29

AI Summary

This study investigates financial risk spillovers in critical mineral investments and their dynamic linkages with energy markets, carbon emissions, and other macroeconomic variables. Utilizing daily data from 2013 to 2023, it pioneers the use of exchange-traded funds (ETFs) for critical minerals—rather than physical commodity prices—to construct a time-varying parameter vector autoregressive (TVP-VAR) model. Integrating dynamic connectedness and net spillover measures, the analysis uncovers time-varying interaction mechanisms among seven mineral ETFs, energy markets, carbon markets, and investor sentiment. The findings reveal that high-ESG-rated assets act predominantly as net transmitters of risk, while cobalt and aluminum ETFs serve as primary sources of shocks; conversely, WTI crude oil and carbon emission futures largely function as net receivers. The COVID-19 pandemic triggered a structural shift in these spillover roles, offering investors actionable insights for hedge strategies grounded in financial network positions.

Abstract

Design/methodology/approach A time-varying parameter vector autoregression (TVP-VAR) model is employed to quantify dynamic connectedness and directional volatility spillovers using daily data from May 1, 2013, to May 2, 2023. The study isolates the impact of extreme events by splitting the data into pre- and post-COVID-19 samples based on the February 2020 stock market crash. Purpose This paper examines the daily financial risk spillovers associated with investing in critical minerals. It examines the dynamic interconnectedness between seven critical mineral Exchange-Traded Fund (ETF) portfolios and key economic-wide variables, including the energy market, carbon emissions, market sentiment, and global infrastructure. Findings Portfolios with high Environmental, Social, and Governance (ESG) scores significantly contribute to shock spillovers. Net directional connectedness analysis reveals that West Texas Intermediate (WTI) crude oil and carbon emission futures consistently act as "net receivers," absorbing volatility from the system. Conversely, Cobalt and Aluminum ETFs primarily act as "net givers," transmitting volatility. The pandemic caused significant structural shifts in these transmission roles. Practical implications The identification of specific net givers and receivers provides actionable insights for investors, facilitating better hedging strategies against time-varying structural breaks and broader economic shocks. Originality This study uniquely utilizes financial ETF data rather than physical mineral prices to capture accessible investment risks. It is among the first to link ESG scores to the directional role (giver vs. receiver) of critical mineral assets within a broader macro-financial network.

Problem

• critical minerals
• volatility spillovers
• energy market
• carbon emissions
• financial risk

Innovation

• TVP-VAR
• volatility spillovers
• critical minerals ETFs
• ESG scores
• dynamic connectedness