In a groundbreaking study poised to reshape our understanding of financial market dynamics, researchers have delved into the intricate web of relationships linking crude oil prices, stock markets, and foreign exchange (forex) markets. Their investigation harnessed sophisticated statistical tools focused on analyzing higher-order moments and cross-moment spillovers—advanced measures capturing subtleties in market volatility and risk beyond simple price fluctuations. By employing realized moment measures integrated within a time-varying parameter vector autoregression (TVP-VAR) extended joint connectedness framework, the study illuminates the complex and evolving nature of risk transmission mechanisms that govern these critical economic sectors during periods of global turmoil.
The analysis underscores that spillovers—where shocks or volatility in one market cascade into others—manifest differently depending on the statistical moments examined. The realized variance (RV) stands out, transmitting the largest total spillover effect at 35.77%, dwarfing realized jump (RJ), realized kurtosis (RK), and realized skewness (RS), which convey respectively 18.16%, 12.93%, and 8.04%. This hierarchy signals that while overall variance dominates contagion risk between markets, sudden price jumps and nuanced distributional shapes of returns also play pivotal roles. Notably, when considered in tandem as a cross-moment system blending these moment measures, the total connectedness persists at a high level of 33.43%, vividly illustrating the intricate interdependencies shaping the markets.
Crude oil emerges as the principal force behind these ripple effects, consistently acting as the dominant net transmitter across all realized moments. Its RV and RJ measures reveal particularly influential roles, accounting for spillovers of 21.78% and 11.33%, respectively. This dominance confirms crude oil’s outsized influence in channeling volatility into both forex and stock markets. Contrarily, the forex market predominantly absorbs the brunt of RV and jump-related shocks, while stock markets appear to be more sensitive to realized kurtosis spillovers, reflecting more subtle distributional risk exposures. Within the cross-moment system, the RV component of crude oil remains the chief transmitter, closely followed by skewness and kurtosis, indicating a layered and differentiated pattern of risk contagion.
The temporal dimension of these spillovers reveals a dynamic, time-varying structure sensitive to global events. Distinct periods of crisis—ranging from the crude oil price crash of mid-2010s, through geopolitical tumult such as the US-China trade war, to health emergencies like the COVID-19 pandemic, and recent conflicts including the Russia-Ukraine and Israel-Hamas wars—trigger marked intensifications in spillover strength. Interestingly, realized variance and jumps are shown to be particularly responsive during widespread health crises, whereas higher-order moments like skewness and kurtosis predominantly respond to geopolitical shocks. This nuanced interplay suggests that different types of market risk propagate distinctively depending on the crisis context.
Examining the chronological progression of net-pairwise connectedness, the study spotlights episodes wherein crude oil transmitted the strongest net RV and RJ spillovers, specifically during the European debt crisis and Arab Spring uprisings in 2010-2011. A parallel surge aligns with the onset of COVID-19 in early 2020, when crude oil’s shockwaves sharply intensified. Furthermore, during the oil price collapse of 2014-2015, crude oil’s realized kurtosis spillovers to forex and stock markets reached unprecedented levels—highlighting how distributional extremes in oil prices invigorate risk transfer. Following the eruption of the Russia-Ukraine war, a notable fresh wave of realized jump spillovers from crude oil to other markets was observed, reinforcing the link between geopolitical instability and cross-market volatility transmission.
This multilayered transmission mechanism has direct policy and investment implications. For policymakers and regulators, the primacy of crude oil in diffusing volatility necessitates refined monitoring and tailored responses during crisis periods. The study advocates for volatility circuit breakers amid health crises—such as those seen during COVID-19—to limit the impact of RV and jump shocks on financial markets. Conversely, geopolitical disturbances demand the development of sophisticated hedging instruments sensitive to realized skewness and kurtosis, enabling multinational financial institutions to better navigate energy-forex risk exposures. Central banks, too, are urged to consider interventions to stabilize currency markets when oil-driven spillovers threaten forex equilibrium.
From an investor’s standpoint, the findings bolster the case for crisis-specific portfolio strategies tuned to the nature of the risk factors involved. During health emergencies characterized by surging RV and jump risks in crude oil prices, defensive postures emphasizing liquidity reserves and the use of energy derivatives for hedging appear prudent. In contrast, geopolitical episodes dominated by higher-order moment shocks may require shifts towards safe-haven assets or diversification across less oil-sensitive asset classes. Such targeted approaches enable more effective management of systemic risk, minimizing contagion while capitalizing on differential asset behavior under varying crisis regimes.
Regulatory implications extend further, recommending that commodity exchanges impose mechanisms such as price bands and margin requirement adjustments responsive to fluctuating crude oil price volatility and evolving forex market conditions. Heightened margin requirements during periods of sharp volatility or major geopolitical disruptions could curb excessive speculative activity and systemic risk. In quieter phases, easing these constraints could enhance market liquidity and efficiency. Additionally, enforcing rigorous stress testing of financial institutions exposed to energy markets and increasing transparency in energy trading are identified as key safeguards against unintended amplification of systemic vulnerabilities.
Elevating the analytical precision, the study’s methodological innovation rests on integrating realized higher-order and cross-moment spillovers within a TVP-VAR framework, capable of capturing the evolving nature of market connectedness with temporal granularity. This approach unveils subtle contagion patterns often masked in simpler models, attributing risk transmission not only to volatility but also to skewness and kurtosis features that matter during turbulent times. The sophisticated joint connectedness analysis across multiple realized moments marks a significant advancement in quantifying and interpreting interconnected financial risks.
Looking ahead, the research highlights fertile avenues for further investigation, notably through frequency domain analysis of spillovers using TVP-VAR frequency connectedness techniques. Such approaches would dissect the temporal scales at which risk transmission operates, unveiling hidden dynamics masked in aggregate time series. Coupled with cutting-edge machine learning methods—particularly explainable artificial intelligence—future studies could isolate the primary drivers and nonlinear patterns underpinning these spillovers, offering enhanced understanding and forecasting abilities critical for market participants and policymakers alike.
Collectively, this research heralds a paradigm shift in grasping how shocks from the crude oil sector penetrate forex and stock realms, emphasizing the necessity of multidimensional risk metrics in decoding these complex interactions. By delineating crisis-specific transmission channels tied to different moments of market returns, the findings equip stakeholders with actionable intelligence to preempt and mitigate systemic risk. As global markets grapple with an increasingly volatile and interconnected environment, such nuanced analysis becomes indispensable for fostering resilient financial systems capable of withstanding multifarious economic and geopolitical disruptions.
Ultimately, the study underscores that no single risk measure suffices to capture the richness of market contagion phenomena. Instead, a mosaic of realized moments—variance, jumps, skewness, and kurtosis—collectively informs our comprehension of crisis-driven spillovers. Recognizing crude oil’s pivotal role as a systemic risk propagator invites renewed focus on energy markets within the broader financial stability discourse. It signals a pressing need for integrated strategies combining regulatory prudence, informed investment practices, and cutting-edge analytics to safeguard global markets in an era marked by unprecedented uncertainty.
As volatility continues to roil world economies and geopolitical upheavals persist, this pioneering inquiry offers a vital blueprint for navigating the intricacies of cross-market risk spillovers. By decoding the complex temporal and distributional dimensions of these contagion mechanisms, it not only advances academic knowledge but also delivers pragmatic guidance tailored to the multifaceted challenges confronting market participants today and into the future.
Article References:
Cui, J., Maghyereh, A. & Ziadat, S. Crude oil, forex, and stock markets: unveiling the higher-order moment and cross-moment risk spillovers in times of turmoil. Humanit Soc Sci Commun 12, 1158 (2025). https://doi.org/10.1057/s41599-025-05308-7
Image Credits: AI Generated
