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Carbon Financial Markets: a time-frequency analysis of CO2 price drivers

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Abstract

We characterize the interrelation of CO2 prices with energy prices (gas and electricity), and with economic activity. Previous studies have relied on time-domain techniques, such as Vector Auto-Regressions. In this study, we use multivariate wavelet analysis, which operates in the time-frequency domain. Wavelet analysis provides convenient tools to distinguish relations at particular frequencies and at particular time horizons. Our empirical approach has the potential to identify relations getting stronger and then disappearing over specific time intervals and frequencies. We are able to examine the coherency of these variables and lead-lag relations at different frequencies for the time periods in focus.

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  • Rita Sousa & Luís Aguiar-Conraria & Maria Joana Soares, 2014. "Carbon Financial Markets: a time-frequency analysis of CO2 price drivers," NIPE Working Papers 03/2014, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:03/2014
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    Cited by:

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    3. Hkiri, Besma & Hammoudeh, Shawkat & Aloui, Chaker & Shahbaz, Muhammad, 2018. "The interconnections between U.S. financial CDS spreads and control variables: New evidence using partial and multivariate wavelet coherences," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 237-257.
    4. He, Kaijian & Xu, Yang & Zou, Yingchao & Tang, Ling, 2015. "Electricity price forecasts using a Curvelet denoising based approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 425(C), pages 1-9.
    5. Wenjun Chu & Shanglei Chai & Xi Chen & Mo Du, 2020. "Does the Impact of Carbon Price Determinants Change with the Different Quantiles of Carbon Prices? Evidence from China ETS Pilots," Sustainability, MDPI, vol. 12(14), pages 1-19, July.
    6. Ahonen, Elena & Corbet, Shaen & Goodell, John W. & Günay, Samet & Larkin, Charles, 2022. "Are carbon futures prices stable? New evidence during negative oil," Finance Research Letters, Elsevier, vol. 47(PB).
    7. Chun Jiang & Yi-Fan Wu & Xiao-Lin Li & Xin Li, 2020. "Time-frequency Connectedness between Coal Market Prices, New Energy Stock Prices and CO 2 Emissions Trading Prices in China," Sustainability, MDPI, vol. 12(7), pages 1-17, April.
    8. Huang, Xuan & An, Haizhong & Gao, Xiangyun & Hao, Xiaoqing & Liu, Pengpeng, 2015. "Multiresolution transmission of the correlation modes between bivariate time series based on complex network theory," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 428(C), pages 493-506.
    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. Costantini, Mauro & Maaitah, Ahmad & Mishra, Tapas & Sousa, Ricardo M., 2023. "Bitcoin market networks and cyberattacks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 630(C).
    11. Pal, Debdatta & Mitra, Subrata K., 2017. "Time-frequency contained co-movement of crude oil and world food prices: A wavelet-based analysis," Energy Economics, Elsevier, vol. 62(C), pages 230-239.
    12. Adekoya, Oluwasegun B. & Oliyide, Johnson A. & Noman, Ambreen, 2021. "The volatility connectedness of the EU carbon market with commodity and financial markets in time- and frequency-domain: The role of the U.S. economic policy uncertainty," Resources Policy, Elsevier, vol. 74(C).
    13. Huang, Shupei & An, Haizhong & Gao, Xiangyun & Wen, Shaobo & Jia, Xiaoliang, 2016. "The global interdependence among oil-equity nexuses," Energy, Elsevier, vol. 107(C), pages 259-271.
    14. Yoshito Funashima, 2018. "Macroeconomic policy coordination between Japanese central and local governments," Empirical Economics, Springer, vol. 54(4), pages 1631-1651, June.
    15. Yang, Lu, 2022. "Idiosyncratic information spillover and connectedness network between the electricity and carbon markets in Europe," Journal of Commodity Markets, Elsevier, vol. 25(C).
    16. Vellachami, Sanggetha & Hasanov, Akram Shavkatovich & Brooks, Robert, 2023. "Risk transmission from the energy markets to the carbon market: Evidence from the recursive window approach," International Review of Financial Analysis, Elsevier, vol. 89(C).
    17. Dan Nie & Yanbin Li & Xiyu Li, 2021. "Dynamic Spillovers and Asymmetric Spillover Effect between the Carbon Emission Trading Market, Fossil Energy Market, and New Energy Stock Market in China," Energies, MDPI, vol. 14(19), pages 1-22, October.
    18. Tan, Xue-Ping & Wang, Xin-Yu, 2017. "Dependence changes between the carbon price and its fundamentals: A quantile regression approach," Applied Energy, Elsevier, vol. 190(C), pages 306-325.
    19. Chai, Shanglei & Zhou, P., 2018. "The Minimum-CVaR strategy with semi-parametric estimation in carbon market hedging problems," Energy Economics, Elsevier, vol. 76(C), pages 64-75.

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    Carbon prices; Financial Markets; Multivariate wavelet analysis.;
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