Alarming contagion effects: The dangerous ripple effect of extreme price spillovers across crude oil, carbon emission allowance, and agriculture futures markets

Yu Wei, Yizhi Wang, Samuel A. Vigne and Zhenyu Ma

Journal of International Financial Markets, Institutions and Money, 2023, vol. 88, issue C

Abstract: The inherent financial interconnections between crude oil prices, carbon emission allowances, and agriculture commodity futures warrant a thorough investigation as fossil energy consumption, carbon emissions, and agriculture plants are three critical components of global environmental protection. This paper aims to quantify not only the normal (mean quantile) static and dynamic spillover effects among them in both time and frequency domains but also the more critical extreme spillovers that occur across various time horizons. Additionally, we explore the vital role of carbon futures in hedging risk and enhancing the performance of oil and agricultural portfolios. Empirical results indicate that, under extreme market situations, the total spillovers among oil, carbon, and agriculture commodity futures are much larger than those under normal conditions. Furthermore, soybean and corn are generally the most potent information transmitters over other futures in the time domain, while carbon emission allowance futures act as an obvious spillover receiver at both normal and extreme market conditions across various time frequencies. Both the total spillover and the net spillover are centered at a short-term frequency (i.e., one to four weeks). Finally, we find that carbon futures can contribute to improving the hedge effectiveness and performance of oil and agricultural portfolios. These findings have valuable implications for policymakers, relevant producers/consumers, as well as futures investors.

Keywords: Spillover analysis; Crude oil; Carbon emission allowance; Agriculture commodities; Normal and extreme connectedness (search for similar items in EconPapers)
JEL-codes: O13 P18 Q50 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:88:y:2023:i:c:s1042443123000896

DOI: 10.1016/j.intfin.2023.101821

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