Global Transmission of Returns among Financial, Traditional Energy, Renewable Energy and Carbon Markets: New Evidence

Mei Wang,Xueqing Yang,Yang Liu

doi:10.3390/en14217286

Abstract

Connections to world markets facilitate local markets developments to support more efficient capital allocation and greater investment and growth opportunities. Under the framework of cross-market rebalancing theory, in this study, we aim to systematically examine the market connections among world financial, energy, renewable energy and European carbon markets by measuring the return spillovers from 2008 to 2021. We find that the renewable energy market is more closely connected to the world financial and energy markets in the sense of the return transmission, while the carbon market is less connected to them. However, due to improved market regulations and determinations related to fighting climate change, the connections between the carbon market and other markets have gradually intensified. Plotting the return spillover indexes, we observe that strong return spillovers from the renewable energy market to other markets occurred when large investment plans were announced. Regarding the carbon market, regulation changes introduced by the EU Commission to improve and stabilize market environment induced intensified return transmission from carbon market to other markets. Another interesting finding is that the highly intensified return transmission among markets due to the COVID-19 crisis started to loosen when COVAX published the first interim distribution forecast on 3 February 2021.

Highlights

Society benefits from efficient markets where capital can freely flow to the most productive or innovative destinations
ES, US, EB, UB, commodity market (CY) and FX are categorized into the finance market group; the crude oil (CO), GE, natural gas (NG) and CL
Markets are placed in the energy market category; and the renewable energy (RE) and carbon market (CE) markets belong to the emerging market group

Summary

Introduction

Society benefits from efficient markets where capital can freely flow to the most productive or innovative destinations. The key ingredient is globally well-connected markets, which can facilitate worldwide capital flows between markets and countries to best allocate resources. If markets are well connected, available capital can find its way to the place where it will be of most benefit anywhere in the world. These investments are beneficial to society overall in that they allow goods and services to be produced, innovations and jobs to be funded, and living standards to be improved. Investors can benefit from such a world market system, in which they can enjoy barrier-free access to any market to develop well-diversified portfolios

Objectives

Methods

Results

Discussion

Conclusion