The Linkages of Carbon Spot-Futures: Evidence from EU-ETS in the Third Phase

Hao Chen, Zhixin Liu, Yinpeng Zhang and You Wu
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Hao Chen: School of Economics and Management, Beihang University, Beijing 100191, China
Zhixin Liu: School of Economics and Management, Beihang University, Beijing 100191, China
Yinpeng Zhang: College of Economics, Shenzhen University, Shenzhen 518061, China
You Wu: School of Economics, Beijing Technology and Business University, Beijing 100048, China

Sustainability, 2020, vol. 12, issue 6, 1-18

Abstract: Based on the prices selected from European Energy Exchange (EEX) from 2013 to 2018, we investigate the inter-correlation of carbon spot and futures markets. Specifically, we adopt the widely used DCC-GARCH model and VAR-BEKK-GARCH model to conduct a comprehensive analysis on the carbon market, i.e., the dynamic correlation and volatility spillover between carbon spot and carbon futures. Moreover, we develop a hedge strategy based on the VAR-BEKK-GARCH model and calculate the hedging effectiveness (HE) value to evaluate the strategy performance. The empirical results show that (i) during our sample period, carbon spot and futures markets are highly correlated, (ii) carbon spot overflows to the futures market and vice versa, and (iii) the HE value is equal to 0.9370, indicating a good performance for the hedging strategy. Then, we provide further discussion on the relationship between carbon spot and futures markets by replacing our dataset with the data of phase II. The results do not change our conclusions on the dynamic correlation and volatility spillover. However, the HE value of phase III is higher than that of phase II, which indicates that the carbon futures market of phase III is not only an available market to hedge risk from the contemporaneous carbon spot market but also has a better hedge effectiveness than phase II.

Keywords: EU-ETS; DCC-GARCH; VAR-BEKK-GARCH; volatility spillover; hedge risk (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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