Return spillover across the carbon market and financial markets: A quantile-based approach

Abstract

This study examines the dynamic risk contagion between carbon and financial markets in extreme market conditions using a freshly developed methodology for spillovers based on quantile VAR modeling. The empirical results suggest that risk spillovers between them are strengthened in extreme market states and reduce the ability of the carbon market to be used for risk hedging in portfolios. Second, there is heterogeneity in the direction and size of spillovers between carbon and financial markets under bull and bear market conditions. This study also reveals that financial and carbon market participants pay more attention to risk information gathered from left-tail events. Finally, the paper identifies the transmitters and receivers of risk spillovers separately. The stock market is an important source of risks, authorities should pay attention to it.