Carbon volatility connectedness and the role of external uncertainties: Evidence from China

Huayi Chen, Huai-Long Shi and Wei-Xing Zhou

Journal of Commodity Markets, 2024, vol. 33, issue C

Abstract: This paper investigates the volatility connectedness between China’s carbon pilot markets. Using Diebold and Yilmaz (2014)’s approach based on the time-varying parameter vector autoregression model with a variety of parameter sets, we obtain the average across 40 results to capture the volatility connectedness between the markets. We further use the linear and nonlinear autoregressive distributed lag models to assess the role of external uncertainties in shaping volatility connectedness. Several findings emerge: (1) Guangdong (Chongqing) is the largest net transmitter (receiver) in terms of volatility connectedness; (2) Volatility connectedness shows a declining trend, with its cycle fluctuations caused by compliance-driven trading; (3) Volatility connectedness correlates negatively with external uncertainties. Both economic policy and climate policy indices have impacts on volatility connectedness. We recommend introducing market makers to enhance market liquidity and reduce risk spreading. We also highlight the need for further research to pinpoint idiosyncratic factors that affect different markets.

Keywords: Volatility connectedness; Policy uncertainty; Carbon markets (search for similar items in EconPapers)
JEL-codes: C32 G10 Q43 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:33:y:2024:i:c:s2405851324000023

DOI: 10.1016/j.jcomm.2024.100383

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