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What do we know about spillover between the climate change futures market and the carbon futures market?

Author

Listed:
  • Mohammad Enamul Hoque

    (BRAC University)

  • Faik Bilgili

    (Erciyes University)

  • Sourav Batabyal

    (E. Craig Wall Sr. College of Business Administration, Coastal Carolina University
    Coastal Carolina University)

Abstract

Climate action-based assumptions and tradable characteristics underpinned the development of climate change futures contracts, which are related to carbon and climate markets. Therefore, this paper examines return and volatility spillover between climate change futures and carbon allowance futures using dynamic conditional correlation (DCC) and asymmetric dynamic conditional correlation (ADCC) models with daily and weekly frequency data. Considering the emergence of US market-based carbon futures and climate futures, this study explores bivariate optimal hedging strategies and optimal portfolio strategies. Using daily data, this study discovers unidirectional and positive return and volatility spillover from the carbon futures market to the climate change futures market, implying opportunities for diversification and hedging. The weekly analysis shows bidirectional and negative return spillover between the carbon futures market and the climate change futures market, implying opportunities for risk hedging. In addition, it also reveals unidirectional and positive volatility spillovers from the carbon futures market to the climate change futures market. The carbon market dominates the climate change futures market. The study also reveals that optimal portfolio strategies will be preferred over optimal hedging strategies. Therefore, this study offers practical implications for investors and portfolio managers.

Suggested Citation

  • Mohammad Enamul Hoque & Faik Bilgili & Sourav Batabyal, 2023. "What do we know about spillover between the climate change futures market and the carbon futures market?," Climatic Change, Springer, vol. 176(12), pages 1-23, December.
    • Handle: RePEc:spr:climat:v:176:y:2023:i:12:d:10.1007_s10584-023-03640-y
    DOI: 10.1007/s10584-023-03640-y
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    More about this item

    Keywords

    Carbon market; Climate change; Futures; Spillover; DCC-ADCC; Hedging;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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