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Volatility spillover and dynamic correlation between the carbon market and energy markets

    Yufeng Chen Affiliation
    ; Fang Qu Affiliation
    ; Wenqi Li Affiliation
    ; Minghui Chen Affiliation

Abstract

This paper studies the volatility spillover and dynamic correlation between EU emission allowance (EUA) prices and energy prices by considering three energy commodities, including oil, gas, and coal. The asymmetric BEKK model is employed for multi-phase analysis of EU ETS, yet only a little empirical evidence backing up the existence of volatility spillover between EU ETS and energy markets, i.e., the establishments of the EU ETS may not effectively limitation and influence energy markets. The time-varying conditional correlation between EUA and each of energy prices is analyzed. The dynamic correlation shows there is a relatively stable, positive correlation between the EUA and Brent oil, natural gas. However, modeling the dynamics correlation also suggests that the correlation between the EUA and the natural gas, coal became weaker and more volatile since second and third phases, especially after the Global Financial Crisis in 2008, which may indicate that the demand reduction in emission allowances caused by the economic slowdown far exceeds the reduction in the annual restraint of EU ETS.

Keyword : volatility spillover, EU ETS, EUA, energy price, asymmetric BEKK model, dynamic correlation

How to Cite
Chen, Y., Qu, F., Li, W., & Chen, M. (2019). Volatility spillover and dynamic correlation between the carbon market and energy markets. Journal of Business Economics and Management, 20(5), 979-999. https://doi.org/10.3846/jbem.2019.10762
Published in Issue
Aug 6, 2019
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This work is licensed under a Creative Commons Attribution 4.0 International License.

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