Abstract
There are direct as well as indirect linkages between economic policy uncertainty and carbon market through the channels of market fundamentals. This paper theoretically analyzes the linkages between economic policy uncertainty and carbon price and empirically examines the impact of Chinese economic policy uncertainty on Hubei carbon prices. A two-regime Markov-Switching process is introduced into the VAR model to examine the impact of economic policy uncertainty during different regimes of the carbon market. The empirical results show that the two-regime Markov-Switching model applies well in modelling the return series from Hubei carbon market during April 2014 to December 2017. Under the two different regimes, although the impacts from economic policy uncertainty are both significantly positive, the magnitude of the impacts differs. The impact of Chinese economic policy uncertainty on Hubei carbon price is larger during the low volatility period on carbon market than that during the high volatility period on carbon market.
Highlights
IntroductionEconomic policy uncertainty (referred as EPU hereinafter), which is defined as uncertainty regarding fiscal, regulatory, or monetary policy [1], has influences on a number of financial and economic fundamentals
Economic policy uncertainty, which is defined as uncertainty regarding fiscal, regulatory, or monetary policy [1], has influences on a number of financial and economic fundamentals
From the estimations of the coefficients, it can be seen that the impact of economic policy uncertainty on Hubei carbon price is significantly positive
Summary
Economic policy uncertainty (referred as EPU hereinafter), which is defined as uncertainty regarding fiscal, regulatory, or monetary policy [1], has influences on a number of financial and economic fundamentals. The key message from these studies is that EPU has a significant impact on both economic fundamentals as well as financial markets, since high uncertainty in the economy can influence the decision-making process of firms, consumers as well as investors. A two-regime Markov-Switching process is introduced into the VAR model to examine the impact of EPU during different stages of the carbon market. This approach is attractive because carbon price exhibits dramatic breaks and distinct changes in regime. Using a nonlinear VAR model can help describe the dynamic impact of economic policy uncertainty on carbon markets under different conditions.
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