Assessment of banking risk in the context of the oil and gas bubbles

This study offers empirical evidence indicating the transfer of price bubbles from the oil and gas markets to banking risk following Russia’s invasion of Ukraine in February 2022 causing the outburst of a major energy crisis. Against this backdrop, the objective of this paper is threefold. First, we employ the Log-Periodic Power Law Singularity (LPPLS) model, to identify both positive and negative bubbles within the oil, gas, and banking markets, characterized by pronounced price fluctuations. As a second objective, the study employs a bivariate vector autoregression (VAR) model, to analyze the explosive price movements within the oil and gas markets and banking risk using the LPPLS series. To reach the third objective, we apply an autoregressive distributed lag (ARDL) model with cointegration, to scrutinize both the long-run and short-run effects of the oil and gas market on banking risk. The paper contributes to the literature on the predictability of bubbles in oil and gas markets and the shift of the transmission bubbles in other markets.