Tail Risk Connectedness in the Refined Petroleum Market: A First Look at the Impact of the COVID Pandemic

We use the conditional autoregressive value at risk (CAViaR) model in combination with the time-varying parameter vector autoregressive (TVP-VAR) based connectedness approach to study the systematic tail risk transmission considering two types of crude oil (Brent and WTI) and also four refined petroleum products prices (gasoline, heating oil, jet fuel and propane) from January, 17, 1997 to December 11, 2020. For robustness purposes, we utilise three commonly used VaR probability cut-off points; that is, 10%, 5% and 2.5%. The selected sample period covers the first stage of the recent COVID-19 pandemic crisis. Results show that, both heating oil and kerosene are persistent net transmitters of uncertainty episodes in the network, signifying the importance of liquidity in the relevant markets. In addition, the role of the two measures of crude oil appears to shift around 2009 following developments in the energy market. Overall, findings suggest that, connectedness rises with major crisis episodes and that the recent COVID-19 pandemic appears to have the potential to propel tail risk and exposure to losses to levels akin to those of the Global Financial Crisis of 2007.