Extreme event shocks and dynamic volatility interactions: The stock, commodity, and carbon markets in China

Abstract

This study adopts the time-varying parameter vector autoregression approach to examine dynamic volatility interactions of the stock, commodity, and carbon markets in China, with specific focus on the effects of extreme event shocks on market interactions. According to the results, a bidirectional Granger causality is observed between the stock and commodity market volatility, whereas these markets unidirectionally Granger cause the carbon market. Furthermore, the impacts of the carbon market on the stock and commodity markets substantially fluctuate, whereas interactions of the stock and commodity markets are relatively smooth. In particular, sudden extreme events have significant effects on market volatility interactions.