The asymmetric and dynamic effects of oil price shocks and geopolitical risks on carbon prices in China

This paper investigates the asymmetric and dynamic effects of oil price shocks and geopolitical risks (GPR) on carbon prices in China. We address this issue using a quantile framework, incorporating the quantile autoregressive distributed lag (QARDL) approach, rolling window QARDL and the quantile Granger causality test. Empirical findings indicate that in the long term, oil risk and supply shocks positively impact carbon prices in bullish markets, while oil demand shocks affect normal and bearish markets. GPR significantly drives carbon prices across all quantiles, except the 0.8 quantile, with the strongest effect observed in extremely bullish markets. In the short term, oil shocks and GPR have a similar but stronger influence. Additionally, both the short- and long-term effects of oil price shocks and GPR vary over time. The ‘camel-hump’ shape of the causality further validates the asymmetric causal effects of oil price shocks and GPR on carbon prices. These findings provide valuable insights for portfolio managers and policymakers, emphasizing the importance of adopting a quantile-based approach to risk management, rather than focusing solely on average effects.