Abstract
This paper studies the volatility spillover and dynamic correlation between EU emission allowance (EUA) prices and energy prices by considering three energy commodities, including oil, gas, and coal. The asymmetric BEKK model is employed for multi-phase analysis of EU ETS, yet only a little empirical evidence backing up the existence of volatility spillover between EU ETS and energy markets, i.e., the establishments of the EU ETS may not effectively limitation and influence energy markets. The time-varying conditional correlation between EUA and each of energy prices is analyzed. The dynamic correlation shows there is a relatively stable, positive correlation between the EUA and Brent oil, natural gas. However, modeling the dynamics correlation also suggests that the correlation between the EUA and the natural gas, coal became weaker and more volatile since second and third phases, especially after the Global Financial Crisis in 2008, which may indicate that the demand reduction in emission allowances caused by the economic slowdown far exceeds the reduction in the annual restraint of EU ETS.
Highlights
Volatility means risk, and volatility spillover represents risk transfer between diverse financial markets
This paper considers dynamic correlation and further investigates the fluctuations in the relationship between EU ETS and energy markets from the time-varying perspective
In order to investigate the asymmetry of volatility spillover, this paper further employ the asymmetric BEKK mothed to analyze the spillover effect between the EU ETS and energy market, which can explore to what type of news the volatility spillovers between EU ETS and energy markets in different phases is more sensitive
Summary
Volatility means risk, and volatility spillover represents risk transfer between diverse financial markets. Understanding the volatility spillover between EU ETS and energy market in various phases has vital reference significance for the establishment and improvement of emission trading schemes in countries around the world. Carbon emission allowance is one of the most essential commodities in the carbon market that is recognized as an efficient way to answer the greenhouse gas (GHG) emission problem. It has been traded on exchanges and Over-The-Counter (OTC) market since the announcement of Kyoto Protocol. Chen et al Volatility spillover and dynamic correlation between the carbon market and energy
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