Economy-energy markets nexus during COVID-19: A dynamic time-frequency analysis

• Main Authors: Mahi, Masnun, Khan, Shamim Ahmed, Zainuddin, Mohammad, Arif, Ishtiaque
• Format: Article
• Published: SAGE Publications 2022
• Subjects: GE Environmental Sciences
• Online Access: http://eprints.um.edu.my/41513/

We investigate dynamics between the economic activities and energy markets-both conventional and clean energy markets, with a sample of daily data from 1 January 2020 to 25 November 2020. We perform wavelet-based time-frequency techniques and measure the market volatility with continuous wavelet transforms. Besides, we use wavelet coherency to understand the co-movement of economic activities and energy markets and employ a nonlinear phase-difference technique to understand the time-varying causality between different series. Our continuous wavelet transform results show that all three market indices experience significant volatility in the coronavirus disease (COVID-19) period, notably during the initial period of the outbreak. The market volatilities are comparatively more substantial in the lower frequency band than the upper frequency, while the latter sustained longer in the markets. Moreover, wavelet coherency results show a strong correlation between the economic activity index and both energy market indices; however, the co-movement is significantly higher for the conventional energy market than the clean energy market. We further detect a positive and bi-directional causality between economic activities and energy market indices. Besides providing fresh and time-varying and frequency-varying relationship between global economic activities and the energy markets, which is currently lacking in the existing literature, our study has significant implications for the heterogeneous market participants in terms of improved price prediction accuracy. Furthermore, our findings can aid policymakers in decision making by showing that the dynamics between energy markets and economic activities change even within a short period, and imply that suitable constant policy interventions are necessary to avoid long-term predicament.