Extreme downside risk transmission between green cryptocurrencies and energy markets: The diversification benefits

Abstract

This study investigates the connectedness between renewable energy cryptocurrencies and various energy categories, focusing on extreme downside risk or tail risk. The research employs a novel framework that combines the CAViaR model with the TVP-VAR based connectedness approach to analyze the systematic tail risk transmission mechanisms. The study covers a period from January 2, 2018, to January 25, 2023, and reveals that Solar and WILDERHILL clean energy markets had the highest risk levels. Conversely, clean energy cryptocurrencies like GARID, POWR, and SNC demonstrated stable tail risk over time, offering diversification benefits, particularly in relation to energy metals and fossil fuels. The study identified strong intra-class connectedness clusters and highlighted extreme risk spillovers during crisis periods through time-varying trends. Several implications for policymakers, investors, and financial market participants are suggested.