TY - JOUR
T1 - Risk transmission from the energy markets to the carbon market
T2 - evidence from the recursive window approach
AU - Vellachami, Sanggetha
AU - Hasanov, Akram Shavkatovich
AU - Brooks, Robert
N1 - Funding Information:
The Graduate Research Merit Scholarship granted to Sanggetha Vellachami for her PhD studies by Monash University Malaysia is sincerely acknowledged. Akram Shavkatovich Hasanov would like to acknowledge Tashkent State University of Economics for hosting him as a visiting scholar.
Publisher Copyright:
© 2023 The Authors
PY - 2023/10
Y1 - 2023/10
N2 - The carbon market is an emerging trading system in the financial services sector, with its global market value increasing from $150 billion in 2010 to $851 billion in 2021. In this study, we examined the volatility transmission from the energy markets (i.e., crude oil, coal, natural gas, and biofuel) to the carbon market in Europe. Our sample period ranged from March 25, 2008, to July 17, 2020, and covered phases of different market conditions. We employed an asymmetric and unrestricted version of the bivariate GARCH-in-mean model, assuming flexible distributions within the recursive window framework. Our empirical findings indicate that (1) carbon market returns are negatively and significantly influenced by crude oil and coal market uncertainties, (2) carbon market volatility is significantly affected by crude oil and coal market volatilities, and (3) the biofuel market does not have a significant relationship with the carbon market, probably because the biofuel market is still young and immature. The results of our study could aid carbon market participants in better understanding the information and risk spillover mechanisms from the energy market to the carbon market and provide them with a basis to formulate policies and make decisions on risk management and portfolio optimization.
AB - The carbon market is an emerging trading system in the financial services sector, with its global market value increasing from $150 billion in 2010 to $851 billion in 2021. In this study, we examined the volatility transmission from the energy markets (i.e., crude oil, coal, natural gas, and biofuel) to the carbon market in Europe. Our sample period ranged from March 25, 2008, to July 17, 2020, and covered phases of different market conditions. We employed an asymmetric and unrestricted version of the bivariate GARCH-in-mean model, assuming flexible distributions within the recursive window framework. Our empirical findings indicate that (1) carbon market returns are negatively and significantly influenced by crude oil and coal market uncertainties, (2) carbon market volatility is significantly affected by crude oil and coal market volatilities, and (3) the biofuel market does not have a significant relationship with the carbon market, probably because the biofuel market is still young and immature. The results of our study could aid carbon market participants in better understanding the information and risk spillover mechanisms from the energy market to the carbon market and provide them with a basis to formulate policies and make decisions on risk management and portfolio optimization.
KW - Asymmetric BEKK
KW - Biofuel market
KW - Carbon market
KW - Fossil energy markets
KW - Recursive window
KW - Skewed Student's t
KW - Volatility transmission
UR - http://www.scopus.com/inward/record.url?scp=85164515674&partnerID=8YFLogxK
U2 - 10.1016/j.irfa.2023.102715
DO - 10.1016/j.irfa.2023.102715
M3 - Article
AN - SCOPUS:85164515674
SN - 1057-5219
VL - 89
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
M1 - 102715
ER -