Electricity Market Crisis in Europe and Cross Border Price Effects: A Quantile Return Connectedness Analysis

Despite the massive impacts of the COVID-19 pandemic and the Russia-Ukraine war on the European
energy market, little is known about their effects on the transmission of risks between member states’
electricity markets and key electricity sources. In this paper, we first employ the quantile connectedness
approach to quantify the return connectedness between eleven European electricity markets, natural gas,
and carbon market, then examine the impacts of the two crises on the interconnectedness. We find a
significant return interconnectedness of the system, mainly driven by the spillover effects among
European electricity markets. An investigation of the connectedness across quantiles shows that the
spillover effects are much stronger at the tails of conditional distribution and the natural gas and carbon
markets are net recipients of return shocks across quantiles. More importantly, our results reveal opposite
effects of the two crises on interconnectedness. While the COVID-19 pandemic reduces the
interconnectedness, the Russia-Ukraine war intensifies the return shock transmission.