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Green or grey stocks? Dynamic effects of carbon markets based on Chinese practices

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  • Yingying Xu

    (Beihang University)

  • Xiang Li

    (University of Science and Technology Beijing)

Abstract

Carbon trading and new energy markets are two key mechanisms for carbon reduction. However, theoretical analysis cannot reveal the complex links between carbon, green, and grey markets. Therefore, this study resorts to the frequency spillover index to explore the overall and directional connectedness of carbon-energy systems in China. The spillover effect indicates the cross-market propagation of information shocks and the potential ripple effects of specific shocks on system-wide changes. Dynamic spillovers suggest that the role of a certain market is not unchanged. In the time domain, both the overall and directional spillovers are closely related with the trading of carbon allowances and tend to show jumps at the beginning and end of the cycle. In the frequency domain, the short-term effects are much stronger than the medium- and long-term effects on all dimensions of the spillover effect. Comparatively, the grey energy is the main information transmitter at the high frequency, whereas it is the green energy playing such a role at medium and low frequencies. Comparing the overall spillovers on carbon markets, the effect of grey energy exceeds that of green energy. Even so, the carbon market plays an important role in the carbon-energy system with extremely significant effects on green and grey energy stocks at certain periods. The results provide profound implications for the management of carbon markets and portfolio optimization.

Suggested Citation

  • Yingying Xu & Xiang Li, 2023. "Green or grey stocks? Dynamic effects of carbon markets based on Chinese practices," Empirical Economics, Springer, vol. 65(6), pages 2521-2547, December.
    • Handle: RePEc:spr:empeco:v:65:y:2023:i:6:d:10.1007_s00181-023-02439-1
    DOI: 10.1007/s00181-023-02439-1
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    More about this item

    Keywords

    Carbon market; Green energy; Grey energy; Spillover effect; Carbon emission;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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