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Tail dependence and risk spillover effects between China's carbon market and energy markets

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  • Liu, Jianing
  • Man, Yuanyuan
  • Dong, Xiuliang

Abstract

This study measures the tail dependence and risk spillover effects between China's carbon market and the coal, crude oil, and natural gas markets using the TVP-Copula-CoVaR method. Our results indicate that China has a high-risk carbon market as it is more vulnerable to extreme external shocks or seasonal fluctuations than the energy markets. Additionally, the upside and downside tail dependence are asymmetric, indicating that investing in carbon markets diminishes the risk of investing in energy commodities. The spillover of downside risks between these markets is noticeably greater than that of upside risks, implying that the carbon and energy markets are all the more susceptible to adverse news and sensitive to extreme declines. The results reveal implications regarding risk assessment and management for investors, portfolio managers, and policymakers at the initial stage of a new carbon market.

Suggested Citation

  • Liu, Jianing & Man, Yuanyuan & Dong, Xiuliang, 2023. "Tail dependence and risk spillover effects between China's carbon market and energy markets," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 553-567.
    • Handle: RePEc:eee:reveco:v:84:y:2023:i:c:p:553-567
    DOI: 10.1016/j.iref.2022.11.013
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    More about this item

    Keywords

    Carbon market; Energy markets; China; Tail dependence; Risk spillover effects;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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