Financial stability and European union allowances: a tale of jumps and regime shifts

Barry Harrison, Iulia Lupu and Radu Lupu

Applied Economics Letters, 2025, vol. 32, issue 16, 2322-2333

Abstract: Using an event-study methodology, we investigate the impact of European Union Allowances (EUA) on measures of systemic risks for financial institutions. We analyse daily data on all banks listed on European exchanges. We find statistically significant abnormal changes in systemic risk measures around days when prices of allowances either jumped or shifted regimes. The paper also documents reduced systemic risk around positive jumps and regime shifts of allowances and increased systemic risk throughout negative jumps and regime shifts. Our contribution to the literature consists in producing evidence that financial stability supports the European carbon market initiative to mitigate climate change. These results have significant implications for policymakers and financial institutions.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:taf:apeclt:v:32:y:2025:i:16:p:2322-2333

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DOI: 10.1080/13504851.2024.2332580

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