The information spillover between carbon price and power sector returns: Evidence from the major European electricity companies

Abstract

This paper investigates the information spillover between carbon price returns and 18 top European electricity companies' stock returns using a connectedness network approach. Our findings show that there is strong information interdependence between carbon price returns and electricity stock returns, as evidenced by a high total connectedness index. In our constructed carbon-electricity market system, the carbon market behaves as an information recipient, receiving varying degrees of information spillover from various power enterprises. Large electricity companies tend to contribute more information to the system than small ones. In addition, our dynamic results show a high, but also volatile, spillover index, which can be a result of changes to the carbon market situation and the financial markets' stability. Finally, an asymmetric effect can be identified when comparing the difference between negative and positive return connectedness networks.