Risk Spillover Effect and Trading Strategy between Carbon Emission Allowance and Carbon-Neutral Index

Abstract

An index based on the carbon-neutral concept stock pool is built, and GARCH-dynamic Copula-CoVaR is used to study the risk spillover effect between the carbon market and the carbon-neutral index. The results show as follows. 1) There is a bi-directional risk spillover between the national carbon emission allowance market and the carbon-neutral index, and the positive correlation is becoming increasingly significant. 2) The correlation between the local carbon market and the carbon-neutral index is weak, and there is an asymmetric risk spillover relationship between them: the former can have a one-way risk impact on the latter. 3) In general, the carbon-neutral index is a net risk receiver, and carbon-neutral concept enterprises face the risk of carbon emission allowance price fluctuation in the process of green transformation. In addition, drawing on the research ideas existed, appropriate “brown assets” and “green assets” in the carbon market and stock market are found, and trading strategies including hedging and pair trading are designed, providing new ideas for investors’ asset allocation.