On the inner dynamics between Fossil fuels and the carbon market: a combination of seasonal-trend decomposition and multifractal cross-correlation analysis.

Abstract

This study examines the inner dynamics of multifractality between the carbon market (EU ETS) and four major fossil fuel energy markets: Brent Crude Oil (BRN), Richards Bay Coal (RBC), UK Natural Gas (NGH2), and FTSE350 electricity index (FTSE350) from January 04, 2016, to March 04, 2022. First, we decompose the daily price changes by applying seasonal and trend decomposition using loess (STL). Then, we examine the inner dynamics of multifractality and cross-correlation by employing multifractal detrended fluctuation analysis (MFDFA) and multifractal detrended cross-correlation analysis (MFDCCA) using the remaining components of the return series. Our findings reveal that all series and the cross-correlations of carbon and fossil fuels markets have multifractal characteristics. We find crude oil to be the most efficient market (lowest multifractal), while coal is the least efficient (highest multifractal). Only coal shows persistent, whereas the other markets exhibit antipersistent behavior. Interestingly, the coal and EU ETS pair demonstrates a higher degree of multifractal patterns. In contrast, the pair of natural gas and EU ETS exhibits the lowest multifractal characteristics among the energy markets. Only the crude oil market shows persistent cross-correlations in the multifractality. These findings have important academic and managerial implications for investors and policymakers.