Risk transmission from the energy markets to the carbon market: Evidence from the recursive window approach

Sanggetha Vellachami, Akram Hasanov and Robert Brooks

International Review of Financial Analysis, 2023, vol. 89, issue C

Abstract: The carbon market is an emerging trading system in the financial services sector, with its global market value increasing from $150 billion in 2010 to $851 billion in 2021. In this study, we examined the volatility transmission from the energy markets (i.e., crude oil, coal, natural gas, and biofuel) to the carbon market in Europe. Our sample period ranged from March 25, 2008, to July 17, 2020, and covered phases of different market conditions. We employed an asymmetric and unrestricted version of the bivariate GARCH-in-mean model, assuming flexible distributions within the recursive window framework. Our empirical findings indicate that (1) carbon market returns are negatively and significantly influenced by crude oil and coal market uncertainties, (2) carbon market volatility is significantly affected by crude oil and coal market volatilities, and (3) the biofuel market does not have a significant relationship with the carbon market, probably because the biofuel market is still young and immature. The results of our study could aid carbon market participants in better understanding the information and risk spillover mechanisms from the energy market to the carbon market and provide them with a basis to formulate policies and make decisions on risk management and portfolio optimization.

Keywords: Fossil energy markets; Biofuel market; Carbon market; Volatility transmission; Skewed Student's t; Asymmetric BEKK; Recursive window (search for similar items in EconPapers)
JEL-codes: C1 C5 G1 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:89:y:2023:i:c:s1057521923002314

DOI: 10.1016/j.irfa.2023.102715

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