Dynamic linkages between economic policy uncertainty and the carbon futures market: Does Covid-19 pandemic matter?

Yue Dou, Yiying Li, Kangyin Dong () and Xiaohang Ren

Resources Policy, 2022, vol. 75, issue C

Abstract: In recent years, the escalating economic policy uncertainty (EPU) spurs a growing body of research on the interactions between EPU and financial markets. However, the spillovers from EPU to the carbon market have been rarely investigated. This study aims to examine the spillover effect of EPU on the carbon futures market under different market conditions. For this purpose, the quantile Granger test method and the quantile regression method are simultaneously employed. The daily data of carbon futures price return and the EPU index covers the period of January 22, 2013 to July 2, 2021. Considering any possible structural changes caused by the COVID-19 outbreak, we further divide the entire sample period into two subperiods, period I spanning from January 22, 2013 to December 31, 2019 and period II from December 31, 2019 to July 2, 2021. In addition, based on the wavelet decomposition approach, we also examine the evolution of the spillover from EPU to carbon futures price return in different time and frequency domains. The results indicate that EPU shocks cannot predict the volatility of daily returns of carbon futures. However, in the long term, EPU has a significantly negative impact on carbon futures price return. The causality is asymmetric across the whole distribution of carbon futures price return. Furthermore, the COVID-19 pandemic affects the spillover and connectedness between EPU and carbon futures price return by influencing their short- and medium-term performances. Finally, several policy implications are highlighted for policymakers and investors.

Keywords: Dynamic spillover; Economic policy uncertainty; Carbon pricing mechanism; Quantile granger causality test; Wavelet analysis (search for similar items in EconPapers)
JEL-codes: C32 D81 E60 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:75:y:2022:i:c:s0301420721004633

DOI: 10.1016/j.resourpol.2021.102455

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