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Can China's national carbon trading market hedge the risks of light and medium crude oil? A comparative analysis with the European carbon market

Author

Listed:
  • Zhu, Pengfei
  • Lu, Tuantuan
  • Shang, Yue
  • Zhang, Zerong
  • Wei, Yu

Abstract

The study explores whether China's national carbon market can hedge the risks of light and medium crude oil compared with the European carbon market, through the diversified and hedging portfolios estimated by the NAGARCHSK-Mixed Copula. The current work confirms the existence of conditional higher moments and asymmetric tail dependence structures in the crude and carbon markets. Furthermore, for all crude oil, although the China's carbon market is slightly inferior to the European carbon market in terms of hedging costs and stability, the hedging effectiveness of the former is better than that of the latter. And Oman crude oil gets better hedging protection from the carbon markets than Brent crude oil. Finally, the diversified portfolios obviously outperform the hedging portfolios in terms of hedging effectiveness.

Suggested Citation

  • Zhu, Pengfei & Lu, Tuantuan & Shang, Yue & Zhang, Zerong & Wei, Yu, 2023. "Can China's national carbon trading market hedge the risks of light and medium crude oil? A comparative analysis with the European carbon market," Finance Research Letters, Elsevier, vol. 58(PA).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323006633
    DOI: 10.1016/j.frl.2023.104291
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