Risk spillovers across the energy and carbon markets and hedging strategies for carbon risk
Shawkat Hammoudeh and
Duc Khuong Nguyen
Energy Economics, 2016, vol. 54, issue C, 159-172
This study examines the risk spillovers between energy futures prices and Europe-based carbon futures contracts. We use a Markov regime-switching dynamic correlation, generalized autoregressive conditional heteroscedasticity (MS-DCC-GARCH) model in order to capture the time variations and structural breaks in the spillovers. We further evaluate the optimal weights, hedging effectiveness, and dynamic hedging strategies for the MS-DCC-GARCH model based on both the regime-dependent and regime-independent optimal hedge ratios. We finally complement our analysis by examining the in- and out-of sample hedging performances for alternative strategies. Our results mainly show significant volatility and time-varying risk transmission from energy markets to carbon market. We also find that spot and futures segments of the emission markets exhibit time-varying correlations and volatile hedging effectiveness. The subsample estimates show significant changes in the hedge effectiveness over the different phases of the European carbon market. These results have important investment and policy implications.
Keywords: Multivariate regime-switching; Time-varying correlations; Hedging; CO2 allowance prices (search for similar items in EconPapers)
JEL-codes: C32 G11 G19 Q47 Q54 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (64) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Risk Spillovers across the Energy and Carbon Markets and Hedging Strategies for Carbon Risk (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:54:y:2016:i:c:p:159-172
Access Statistics for this article
Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant
More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().