Spillover effects and nonlinear correlations between carbon emissions and stock markets: An empirical analysis of China's carbon-intensive industries

Abstract

This study analyzes the correlations between carbon emissions and related industry stock markets in China. We propose a carbon-intensive industry index firstly. According to the Spillover Index, the two markets interact and the carbon-intensive stock market acts as an information receiver in most cases. We apply the Multifractal Cross-Correlation Analysis, Detrended Cross-Correlation Coefficient, and the modified Time-lagged Detrended Cross-Correlation to characterize the nonlinear correlations between carbon allowance price returns and the stock returns of carbon-intensive industries. The carbon emission trading market is found to be more volatile and inefficient than the stock market; the properties of the carbon trading pilot explain the direction and magnitude of the nonlinear correlations. The level of intervention by the government authority affects the magnitude of correlations; the strongest dynamic return spillovers and the most persistent time-lag cross-correlations were observed in the Shenzhen pilot—the most market-oriented carbon emission trading pilot in China. The allowance allocation method plays an important role in deciding the direction of the nonlinear correlations. Our empirical results show the stock returns of carbon-intensive industries and the carbon allowance price returns were positively cross-correlated in Shenzhen and Shanghai pilots, while the cross-correlations were negative in Beijing, Guangdong, and Hubei pilots.