Risk Spillovers across the Energy and Carbon Markets and Hedging Strategies for Carbon Risk
Shawkat Hammoudeh and
Duc Khuong Nguyen
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Shawkat Hammoudeh: 3200 Market Street Philadelphia, PA 19104 U.S.A Author-Email: -
No 15-10, Working Papers from Eastern Mediterranean University, Department of Economics
This study examines the risk spillovers between energy futures prices and Europe-based carbon futures contracts. We use a Markov regime-switching dynamic correlation, generalized autoregressive conditional heteroscedasticity (MSDCC- GARCH) model in order to capture the time variations and structural breaks in the spillovers. We further evaluate the optimal weights, hedging effectiveness, and dynamic hedging strategies for the MS-DCC-GARCH model based on both the regime dependent and regime independent optimal hedge ratios. We finally complement our analysis by examining the in- and out-of sample hedging performances for alternative strategies. Our results mainly show significant volatility and time-varying risk transmission from energy markets to carbon market. We also find that spot and futures segments of the emission markets exhibit time-varying correlations and volatile hedging effectiveness. These results have important investment and policy implications
Keywords: Multivariate regime-switching; time-varying correlations; hedging; CO2 allowance prices (search for similar items in EconPapers)
JEL-codes: C32 G11 G19 Q47 Q54 (search for similar items in EconPapers)
Pages: 29 pages
New Economics Papers: this item is included in nep-ene, nep-env, nep-ger, nep-ore and nep-rmg
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http://repec.economics.emu.edu.tr/RePEc/emu/wpaper/15-10.pdf First version, 2014 (application/pdf)
Journal Article: Risk spillovers across the energy and carbon markets and hedging strategies for carbon risk (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:emu:wpaper:15-10.pdf
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