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How connected is the carbon market to energy and financial markets? A systematic analysis of spillovers and dynamics
journal contributionposted on 13.07.2020 by Xueping Tan, Kavita Sirichand, Andrew Vivian, Xinyu Wang
Any type of content formally published in an academic journal, usually following a peer-review process.
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.
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Natural Science Foundation of China [grant number 71871215, 71701201].
- Business and Economics