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How connected is the carbon market to energy and financial markets? A systematic analysis of spillovers and dynamics

journal contribution
posted on 13.07.2020, 10:48 by Xueping Tan, Kavita Sirichand, Andrew Vivian, Xinyu Wang
Carbon allowances are a new class of financial instrument which aim to assist in limiting the extent and impact of global warming and climate change. The feedback mechanism in the “CarbonEnergy-Finance” system makes the information connectedness dynamics more complex since we add equity, bond and non-energy commodity assets into the system. Using modified error variance decomposition and network diagrams, we quantify and systematically analyze how the European carbon market connects with information from a wide range of other markets. Our results indicate: (i) the nature of information spillover changes over time, with system-wide return connectedness being higher and more variable than the volatility interdependence; (ii) both the oil and carbon markets closely connect with equity and non-energy commodity markets rather than bond markets; (iii) we identify three structural breaks in carbon volatility and their implication for carbon-finance linkages; (iv) financial risk-type macroeconomic factors make greater contributions to system-wide connectedness than commodity factors. These findings have economic implications for investors, portfolio managers and policymakers.

Funding

Natural Science Foundation of China [grant number 71871215, 71701201].

History

School

  • Business and Economics

Department

  • Business

Published in

Energy Economics

Volume

90

Publisher

Elsevier

Version

AM (Accepted Manuscript)

Rights holder

© Elsevier

Publisher statement

This paper was accepted for publication in the journal Energy Economics and the definitive published version is available at https://doi.org/10.1016/j.eneco.2020.104870.

Acceptance date

07/07/2020

Publication date

2020-07-22

Copyright date

2020

ISSN

0140-9883

Language

en

Depositor

Prof Andrew Vivian. Deposit date: 9 July 2020

Article number

104870

Exports