The impact of economic policy uncertainties on the volatility of European carbon market

Peng-Fei Dai, Xiong Xiong, Toan Luu Duc Huynh and Jiqiang Wang

Journal of Commodity Markets, 2022, vol. 26, issue C

Abstract: The European Union Emission Trading Scheme is a carbon emission allowance trading system designed by Europe to achieve emission reduction target. The amount of carbon emission caused by production activities is closely related to the socio-economic environment. Therefore, from the perspective of economic policy uncertainty, this article constructs the GARCH-MIDAS-EUEPU and GARCH-MIDAS-GEPU models for investigating the impact of European and global economic policy uncertainty on the volatility of the European carbon market. The results show that both European and global economic policy uncertainty will exacerbate the long-term volatility of European carbon spot return, with the latter having a stronger impact when the change is the same. Moreover, the volatility of the European carbon spot return can be forecasted better by the predictor, global economic policy uncertainty. This research can provide some implications for market managers in grasping carbon market trends and helping participants control the risk of fluctuations in carbon allowances.

Keywords: EU ETS; Carbon market; Global economic policy uncertainty; European economic policy uncertainty; Volatility forecasting (search for similar items in EconPapers)
JEL-codes: C53 F37 G13 Q54 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:26:y:2022:i:c:s2405851321000416

DOI: 10.1016/j.jcomm.2021.100208

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