Volatility spillover of energy markets into EUA markets under EU ETS: a multi-phase study

Ajay K. Dhamija (), Surendra S. Yadav () and Jain Pk ()
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Ajay K. Dhamija: Ministry of Defence
Surendra S. Yadav: Indian Institute of Technology (IIT)
Jain Pk: Indian Institute of Technology (IIT)

Environmental Economics and Policy Studies, 2018, vol. 20, issue 3, No 4, 591 pages

Abstract: Abstract Carbon Management is a strategic priority and organizations need to forecast returns and volatility of carbon for that. Volatility is synonymous with risk and so an understanding of volatility in EUA market is important for making investment decisions. Large changes in volatility of EUA market are capable of giving adverse signals to risk averse investors. The price of EUA, understandably, moves together with prices of crude oil, coal and natural gas. Using EUA daily returns from 2005 to 2015 (covering all three phases of EU ETS and EUA Continuous Series), we investigate volatility co-movement between the EUA market and the energy markets i.e. brent (crude oil), coal and natural gas markets. We employ Multivariate GARCH (BEKK-MGARCH) model and use data of European Climate Exchange Dec 2007, Dec 2012, Dec 2015 expiry and the Continuous Dec 2015 expiry EUA future contracts. The empirical results indicate that there is a high degree of volatility co-movement between EUA market and the markets of brent, coal and natural gas. Results support small but significant volatility spillover from energy markets into EUA markets. At a substantive level, studies on volatility co-movement and spillover provide useful and actionable information for risk analysis.

Keywords: EUA; EU ETS; Volatility co-movement; Volatility spillover; Multivariate GARCH; BEKK-MGARCH (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10018-017-0206-5

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