Analysis of Dynamic Connectedness Relationships among Clean Energy, Carbon Emission Allowance, and BIST Indexes

Abstract

Understanding and examining energy markets correctly is crucial for stakeholders to attain maximum benefit and avoid risks. As a matter of fact, the volatility that occurred in energy markets and recent crises had major impacts on national economies. Dynamic connectedness relationships (DCRs) can make quite powerful predictions for both low-frequency data and limited time-series data. The objective of this study is to explicate the dynamic connectedness relationships among the BIST sustainability index, BIST 100 index, S&P Global Clean Energy index (S&P GCEI), and S&P GSCI carbon emission allowances (EUA). The daily data obtained over the period 11 April 2014–11 November 2022 were used for the research study. The DCRs among the variables used in the study were investigated by employing the time-varying parameter vector autoregressive (TVP-VAR) model. As a result of the study, the volatility from carbon emission allowances was determined to spill over to S&P GCEI, BIST 100, and BIST sustainability indexes. During the COVID-19 pandemic, significant reductions were detected in the volatility spillover (VS) from carbon emission allowances to S&P GCEI, BIST 100, and BIST sustainability indexes. Moreover, it was revealed that a weak VS existed from S&P GCEI to BIST sustainability and BIST 100 indexes. The findings reveal the importance of policymakers taking some incentive measures in EUA prices and also its role in portfolio diversification.