Analyzing spillover effects between carbon and fossil energy markets from a time-varying perspective. (1st March 2021)

• Record Type: Journal Article
• Authors: Gong, Xu; Shi, Rong; Xu, Jun; Lin, Boqiang
• Is Part Of: Applied energy. Volume 285(2021)
• Publication Date: 2021-03-01
• Subjects: Time-varying spillover effects -- Time lag -- Periodicity -- TVP-VAR-SV model -- Impulse response function; Power (Mechanics) -- Periodicals; Energy conservation -- Periodicals; Energy conversion -- Periodicals; 621.042
• DOI: 10.1016/j.apenergy.2020.116384
• Languages: English
• ISSNs: 0306-2619

Abstract

Highlight: The paper chooses a new perspective of time-varying, time lag, and periodicity. The paper employs the TVP-VAR-SV model and impulse response function. There are obvious spillover effects between the carbon and fossil energy markets. The spillover effects are time-varying and asymmetrical. The spillover effects usually last for about three weeks. Abstract: The carbon market is closely related to fossil energy markets, but few studies focus on the intensity and direction of the time-varying spillover effects, the time delaying and periodicity between the two classes of markets. This paper uses the time-varying vector parameter autoregressive model with stochastic volatility (TVP-VAR-SV model) and impulse response function to study these issues based on the weekly data of European carbon futures prices and three fossil energy (oil, coal, and natural gas) futures prices. The empirical results indicate that: Firstly, there are obvious spillover effects between the carbon market and fossil energy markets, in which the strength and direction are time-varying and asymmetrical. Secondly, as a whole, the coal market has the greatest impact on the carbon market. Finally, the duration of the time-varying spillover effects between the carbon market and fossil energy markets is around three weeks, and the spillover effect diminishes over time. Especially, the time-varying spillover effect is most significant in the case of one-week lag. The above results can provide practical advice for investors, relevant companies and policymakers. Moreover, it can improve the carbon market mechanism to achieve the purpose of emission reduction.