Dynamic spillovers between the carbon, stock, and energy markets: A New Zealand case

Abstract

The Emission Trading Scheme (ETS) is an essential instrument tightly interconnected with the stock and energy markets. This study innovatively incorporates the ETS, stock, and energy markets into an integrated framework to model the return and volatility spillovers. We utilize a dynamic Time-Varying AutoRegressive procedure grounded in both the temporal and frequency domains. Our findings certify time-varying effects in both return and volatility spillovers. Remarkably, extreme events such as the COVID-19 pandemic and New Zealand's ETS-led policies have contributed substantially to these spillovers. Specifically, for return spillovers, the price movements of the stock and the crude oil markets are distinctly influenced by the ETS and electricity markets. On the other hand, volatility spillovers in stock and energy markets are predominantly dominated by the ETS. Furthermore, return and volatility spillovers exhibit substantial heterogeneity across different frequencies, with long-term effects making up the most considerable portion of cross-market spillovers. These findings help gain a deeper understanding of dynamic feedback effects and offer valuable implications for policymakers and market participants.