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Exploring the risk spillover effects between carbon market and electricity market: A bidimensional empirical mode decomposition based conditional value at risk approach

Bangzhu Zhu, Liqing Huang, Lili Yuan, Shunxin Ye and Ping Wang

International Review of Economics & Finance, 2020, vol. 67, issue C, 163-175

Abstract: This study proposes a bidimensional empirical mode decomposition based conditional value at risk approach to explore the risk spillover effects between carbon market and electricity market. Firstly, bidimensional empirical mode decomposition is applied to decompose the pair of carbon and electricity prices into a series of simple modes with different frequencies. Secondly, conditional value at risk is used to capture the risk spillover effects between carbon market and electricity market at each frequency. The empirical results show that the risks of high frequency modes are higher than those of intermediate and low frequency modes. Carbon market has a positive risk spillover on electricity market, and electricity market has a negative risk spillover on carbon market. For high and low frequency modes, the risk spillover effects from carbon market to electricity market are positive, however those from electricity market to carbon market are negative. For intermediate frequency modes, there are bidirectional negative risk spillover effects between carbon market and electricity market.

Keywords: Risk spillover; Carbon market; Electricity market; Bidimensional empirical mode decomposition; Conditional value at risk (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:67:y:2020:i:c:p:163-175

DOI: 10.1016/j.iref.2020.01.003

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