Multiscale interplay of higher-order moments between the carbon and energy markets during Phase III of the EU ETS

Xingyu Dai, Ling Xiao, Qunwei Wang and Gurjeet Dhesi

Energy Policy, 2021, vol. 156, issue C

Abstract: The Phase III of the European Union Emission Trading System (EU ETS) is significantly different from the previous Phases in terms of price trajectory and operational mechanism. Against this background, this study reveals the multiscale interplay of higher-order moments (skewness and kurtosis) between the carbon and energy markets, and formulates optimal portfolio strategies to manage higher-order moments risks at different time horizons. We detect a breakpoint, September 15, 2016, in the carbon-energy markets which divides Phase III into two stages corresponding to different market status. Our findings show that the bidirectional higher-order moments spillovers between the carbon and energy markets are weak at the short-run timescales (below 16 trading days), while the long-run (over 16 trading days) higher-order spillover effect is greatly enhanced. In particular, we find the spillovers in the higher-order moments are strong when the carbon and energy markets are in bullish status. Furthermore, we demonstrate that carbon assets are good short-run hedge against exposure to spillover risks in higher-order moments of the energy markets, while the hedging effectiveness declines at the long-run timescales.

Keywords: EU ETS; Energy markets; Higher-order moments; Multiscale analysis; Portfolio management (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:156:y:2021:i:c:s0301421521002986

DOI: 10.1016/j.enpol.2021.112428

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