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Do EU-China spillover effects inhibit China's carbon market volatility? A mixed data sampling approach

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  • Fang, Yan
  • Zhu, Chen
  • Chen, Xiaojing
  • Yi, Yang

Abstract

As global carbon markets become increasingly interconnected, understanding cross-border spillover effects is essential for managing volatility in domestic carbon markets. Using data from October 2017 to December 2023, this study investigates how EU-China spillover effects influence volatility in China's carbon market. We first construct a weekly spillover index via the spillover network approach, and then apply the MIDAS model to estimate the impact of these spillovers on China's monthly carbon price volatility. The results show that EU-China spillover effects significantly reduce volatility, particularly in the short term. Further analysis based on the MF-VAR model reveals that the impact of spillovers varies across different weeks within a month. Mechanism analysis indicates that improvements in green performance, triggered by external policy signals such as the Carbon Border Adjustment Mechanism, serve as an important channel through which EU-China spillovers stabilize China's carbon market volatility. These findings highlight the importance of enhanced policy coordination with major markets like the EU in mitigating the price volatility and strengthening carbon market governance in China.

Suggested Citation

  • Fang, Yan & Zhu, Chen & Chen, Xiaojing & Yi, Yang, 2025. "Do EU-China spillover effects inhibit China's carbon market volatility? A mixed data sampling approach," International Review of Financial Analysis, Elsevier, vol. 106(C).
    • Handle: RePEc:eee:finana:v:106:y:2025:i:c:s1057521925006532
    DOI: 10.1016/j.irfa.2025.104566
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    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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • P28 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Natural Resources; Environment
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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