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Risk Spillovers across the Energy and Carbon Markets and Hedging Strategies for Carbon Risk

Listed author(s):
  • Mehmet Balcilar

    ()

    (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus)

  • Riza Demirer

    ()

    (Department of Economics & Finance Southern Illinois University)

  • Shawkat Hammoudeh

    (3200 Market Street Philadelphia, PA 19104 U.S.A Author-Email: -)

  • Duc Khuong Nguyen

This study examines the risk spillovers between energy futures prices and Europe-based carbon futures contracts. We use a Markov regime-switching dynamic correlation, generalized autoregressive conditional heteroscedasticity (MSDCC- GARCH) model in order to capture the time variations and structural breaks in the spillovers. We further evaluate the optimal weights, hedging effectiveness, and dynamic hedging strategies for the MS-DCC-GARCH model based on both the regime dependent and regime independent optimal hedge ratios. We finally complement our analysis by examining the in- and out-of sample hedging performances for alternative strategies. Our results mainly show significant volatility and time-varying risk transmission from energy markets to carbon market. We also find that spot and futures segments of the emission markets exhibit time-varying correlations and volatile hedging effectiveness. These results have important investment and policy implications

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File URL: http://repec.economics.emu.edu.tr/RePEc/emu/wpaper/15-10.pdf
File Function: First version, 2014
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Paper provided by Eastern Mediterranean University, Department of Economics in its series Working Papers with number 15-10.

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Length: 29 pages
Date of creation: 2014
Handle: RePEc:emu:wpaper:15-10.pdf
Contact details of provider: Phone: 90 (392) 630-1291
Fax: 90 (392) 365-1017
Web page: http://economics.emu.edu.tr/

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