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Adaptive-Lasso MGARCH for the Volatility Spillover of Transition Finance

Author

Listed:
  • Xu, Yongdeng

    (Cardiff University, Cardiff, UK)

  • Lyu, Juyi

    (Loughborough University, UK)

  • Mazouz, Khelifa

    (Cardiff University, Cardiff, UK)

Abstract

Most transition-finance assets (green bonds, EU emission allowances, clean-energy equities) have only a few years of daily data and virtually no intraday history, rendering standard spillover tools either infeasible (high-dimensional MGARCH) or inapplicable (realized-variance VARs). We develop an Adaptive-Lasso MGARCH (AL-MGARCH) estimator that applies an L1 penalty with adaptive weights to shrink negligible cross-effects to zero, reducing the active parameter set from O(N^2) to O(N) while retaining oracle-selection properties. We also generalise Diebold–Yilmaz–style connectedness to daily returns, enabling single-step monitoring of transition-risk networks when intraday data are unavailable. Using eight daily series (2018–2025), we document a bond-centred volatility regime before 2022 and a natural-gas- and coal-centred regime after the Russia–Ukraine shock, reconciling mixed evidence on whether green assets hedge or amplify systemic risk.

Suggested Citation

  • Xu, Yongdeng & Lyu, Juyi & Mazouz, Khelifa, 2025. "Adaptive-Lasso MGARCH for the Volatility Spillover of Transition Finance," Cardiff Economics Working Papers E2025/19, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2025/19
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    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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