Time–frequency analysis of the interaction mechanism between European carbon and crude oil markets

Yaqi Wu, Chen Zhang, Po Yun, Dandan Zhu, Wei Cao and Zulfiqar Ali Wagan

Energy & Environment, 2021, vol. 32, issue 7, 1331-1357

Abstract: The joint behavior of internal and external system brings out a high complexity of the carbon and oil price interactions, such as non-linearity and multi-frequency. This paper innovatively proposed a time-frequency mechanism between carbon and oil markets from the two aspects of internal system and external factors, and introduced a novelty partial wavelet analytics to explore their dynamic multi-scale interactions. We selected the European carbon and Brent oil futures prices data from March 2009 to December 2020, with the consideration of several necessary control variables from the external surroundings. Our findings point to a stable and strong in-phase relationship between the two markets, with oil leading at medium and lower frequencies. However, the mutual leading relationships are especially sensitive during abnormal political events and periods of financial recession and global emergency, which are observed at different periods for intermediate horizons. What is more, the interactions are more diversified and feebler at short-timescale. Under the vision of carbon neutrality, these evidences provide invaluable guidance for regulators to structure a more flexible adjusting mechanism for the risk control of carbon markets, and also help investors to hedge risk aimed at different time horizons.

Keywords: Carbon market; crude oil market; time–frequency; interaction mechanism; wavelet analysis (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:engenv:v:32:y:2021:i:7:p:1331-1357

DOI: 10.1177/0958305X211002457

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