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The impact of economic policy uncertainties on the volatility of European carbon market

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  • Peng-Fei Dai
  • Xiong Xiong
  • Toan Luu Duc Huynh
  • Jiqiang Wang

Abstract

The European Union Emission Trading Scheme is a carbon emission allowance trading system designed by Europe to achieve emission reduction targets. The amount of carbon emission caused by production activities is closely related to the socio-economic environment. Therefore, from the perspective of economic policy uncertainty, this article constructs the GARCH-MIDAS-EUEPU and GARCH-MIDAS-GEPU models for investigating the impact of European and global economic policy uncertainty on carbon price fluctuations. The results show that both European and global economic policy uncertainty will exacerbate the long-term volatility of European carbon spot return, with the latter having a stronger impact when the change is the same. Moreover, the volatility of the European carbon spot return can be forecasted better by the predictor, global economic policy uncertainty. This research can provide some implications for market managers in grasping carbon market trends and helping participants control the risk of fluctuations in carbon allowances.

Suggested Citation

  • Peng-Fei Dai & Xiong Xiong & Toan Luu Duc Huynh & Jiqiang Wang, 2020. "The impact of economic policy uncertainties on the volatility of European carbon market," Papers 2007.10564, arXiv.org, revised Aug 2021.
    • Handle: RePEc:arx:papers:2007.10564
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    References listed on IDEAS

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    Citations

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    Cited by:

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    3. Song, Xiang & Wang, Dingyu & Zhang, Xuantao & He, Yuan & Wang, Yong, 2022. "A comparison of the operation of China's carbon trading market and energy market and their spillover effects," Renewable and Sustainable Energy Reviews, Elsevier, vol. 168(C).
    4. Wang, Kai-Hua & Liu, Lu & Zhong, Yifan & Lobonţ, Oana-Ramona, 2022. "Economic policy uncertainty and carbon emission trading market: A China's perspective," Energy Economics, Elsevier, vol. 115(C).
    5. Xinyu Wu & Xuebao Yin & Xueting Mei, 2022. "Forecasting the Volatility of European Union Allowance Futures with Climate Policy Uncertainty Using the EGARCH-MIDAS Model," Sustainability, MDPI, vol. 14(7), pages 1-13, April.
    6. Dai, Peng-Fei & Xiong, Xiong & Zhang, Jin & Zhou, Wei-Xing, 2022. "The role of global economic policy uncertainty in predicting crude oil futures volatility: Evidence from a two-factor GARCH-MIDAS model," Resources Policy, Elsevier, vol. 78(C).
    7. Bo Li & Sabri Boubaker & Zhenya Liu & Waël Louhichi & Yao Yao, 2023. "Exploring the Nonlinear Idiosyncratic Volatility Puzzle: Evidence from China," Computational Economics, Springer;Society for Computational Economics, vol. 62(2), pages 527-559, August.
    8. Guo, Xiaozhu & Huang, Dengshi & Li, Xiafei & Liang, Chao, 2023. "Are categorical EPU indices predictable for carbon futures volatility? Evidence from the machine learning method," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 672-693.
    9. Tian, Tingting & Lai, Kee-hung & Wong, Christina W.Y., 2022. "Connectedness mechanisms in the “Carbon-Commodity-Finance” system: Investment and management policy implications for emerging economies," Energy Policy, Elsevier, vol. 169(C).
    10. Lien, Donald & Zhang, Jiewen & Yu, Xiaojian, 2022. "Effects of economic policy uncertainty: A regime switching connectedness approach," Economic Modelling, Elsevier, vol. 113(C).
    11. Demiralay, Sercan & Gencer, Hatice Gaye & Bayraci, Selcuk, 2022. "Carbon credit futures as an emerging asset: Hedging, diversification and downside risks," Energy Economics, Elsevier, vol. 113(C).
    12. Lorente, Daniel Balsalobre & Mohammed, Kamel Si & Cifuentes-Faura, Javier & Shahzad, Umer, 2023. "Dynamic connectedness among climate change index, green financial assets and renewable energy markets: Novel evidence from sustainable development perspective," Renewable Energy, Elsevier, vol. 204(C), pages 94-105.

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