Investigating Volatility Spillover between the Energy Market and the Sectoral Stock Markets in Malaysia: Evidence from VHAR-Type Models

This study examines the realised volatility spillover effects between Malaysia's energy market and other sectoral indices on the Kuala Lumpur Stock Exchange from September 2018 to December 2024. To address the limitations of current volatility modelling approaches, this study employs the Vector Heterogeneous Autoregressive (VHAR) model combined with the Realised Range-Based Volatility (RRV) measure to capture heterogeneous market behaviours at daily, weekly, and monthly time horizons. High-frequency data from September 2018 to December 2024 (earlier data are unavailable for some sectors) were collected from the financial data provider Bloomberg. The findings reveal that the energy sector exhibits strong volatility persistence, with past volatility having a significant influence on current volatility levels. More importantly, this study documents spillover effects. While the energy sector experiences limited volatility transmission from other sectors, it exerts substantial influence on the volatility of most other sectors, notably demonstrating adverse long-term effects but positive short- and medium-term impacts. The healthcare sector appears to be uniquely immune to the energy market volatility contagion. A comparative analysis confirms that the VHAR-RRV model substantially outperforms traditional Vector Autoregressive (VAR) models and modestly surpasses VHAR models using standard realised volatility measures. These results offer valuable insights into portfolio diversification strategies, risk management practices, and policy formulation in Malaysia and similar emerging markets, where energy sector dynamics have a significant impact on broader market stability.