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Nonlinear structure analysis of carbon and energy markets with MFDCCA based on maximum overlap wavelet transform

Cao Guangxi and Wei Xu

Physica A: Statistical Mechanics and its Applications, 2016, vol. 444, issue C, 505-523

Abstract: This paper investigates the nonlinear structure between carbon and energy markets by employing the maximum overlap wavelet transform (MODWT) as well as the multifractal detrended cross-correlation analysis based on maximum overlap wavelet transform (MFDCCA-MODWT). Based on the MODWT multiresolution analysis and the statistic Qcc(m) significance, relatively significant cross-correlations are obtained between carbon and energy future markets either on different time scales or on the whole. The result of the Granger causality test indicates bidirectional Granger causality between carbon and electricity future markets, although the Granger causality relationship between the carbon and oil price is not evident. The existence of multifractality for the returns between carbon and energy markets is proven with the MFDCCA-MODWT algorithm. In addition, results of investigating the origin of multifractality demonstrate that both long-range correlations and fat-tailed distributions play important roles in the contributions of multifractality.

Keywords: Nonlinear structure; Carbon market; Energy market; MODWT; MFDCCA (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.physa.2015.10.070

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