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Volatility Spillovers and Causality of Carbon Emissions, Oil and Coal Spot and Futures for the EU and USA

Author

Listed:
  • Chia-Lin Chang

    (National Tsing Hua University, Taiwan)

  • Michael McAleer

    () (National Tsing Hua University, Taiwan; University of Sydney Business School; Erasmus University Rotterdam, The Netherlands, Complutense University of Madrid, Spain and Yokohama National University, Japan.)

  • Guangdong Zuo

    (National Tsing Hua University, Taiwan)

Abstract

Recent research shows that efforts to limit climate change should focus on reducing emissions of carbon dioxide over other greenhouse gases or air pollutants. Many countries are paying substantial attention to carbon emissions to improve air quality and public health. The largest source of carbon emissions from human activities in some countries in Europe and elsewhere is from burning fossil fuels for electricity, heat, and transportation. The price of fuel influences carbon emissions, but the price of carbon emissions can also influence the price of fuel. Owing to the importance of carbon emissions and their connection to fossil fuels, and the possibility of Granger (1980) causality in spot and futures prices, returns and volatility of carbon emissions, it is not surprising that crude oil and coal have recently become a very important research topic. For the USA, daily spot and futures prices are available for crude oil and coal, but there are no daily spot or futures prices for carbon emissions. For the EU, there are no daily spot prices for coal or carbon emissions, but there are daily futures prices for crude oil, coal and carbon emissions. For this reason, daily prices will be used to analyse Granger causality and volatility spillovers in spot and futures prices of carbon emissions, crude oil, and coal. A likelihood ratio test is developed to test the multivariate conditional volatility Diagonal BEKK model, which has valid regularity conditions and asymptotic properties, against the alternative Full BEKK model, which has valid regularity conditions and asymptotic properties under the null hypothesis of zero off-diagonal elements. Dynamic hedging strategies using optimal hedge ratios will be suggested to analyse market fluctuations in the spot and futures returns and volatility of carbon emissions, crude oil and coal prices.

Suggested Citation

  • Chia-Lin Chang & Michael McAleer & Guangdong Zuo, 2017. "Volatility Spillovers and Causality of Carbon Emissions, Oil and Coal Spot and Futures for the EU and USA," Tinbergen Institute Discussion Papers 17-051/III, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20170051
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    References listed on IDEAS

    as
    1. Chia-Lin Chang & Yiying Li & Michael McAleer, 2018. "Volatility Spillovers between Energy and Agricultural Markets: A Critical Appraisal of Theory and Practice," Energies, MDPI, Open Access Journal, vol. 11(6), pages 1-19, June.
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    1. repec:gam:jeners:v:11:y:2018:i:6:p:1595-:d:153161 is not listed on IDEAS
    2. Chia-Lin Chang & Yiying Li & Michael McAleer, 2018. "Volatility Spillovers between Energy and Agricultural Markets: A Critical Appraisal of Theory and Practice," Energies, MDPI, Open Access Journal, vol. 11(6), pages 1-19, June.
    3. Chang, C-L. & Mai, T.K. & McAleer, M.J., 2018. "Establishing National Carbon Emission Prices for China," Econometric Institute Research Papers 18-028/III, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    4. Chang, C-L. & Mai, T.K. & McAleer, M.J., 2018. "Pricing Carbon Emissions in China," Econometric Institute Research Papers EI 2018-05, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    5. Chia-Lin Chang & Michael McAleer, 2018. "The Fiction of Full BEKK: Pricing Fossil Fuels and Carbon Emissions," Documentos de Trabajo del ICAE 2018-08, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.

    More about this item

    Keywords

    Carbon emissions; Fossil fuels; Crude oil; Coal; Low carbon targets; Green energy; Spot and futures prices; Granger causality and volatility spillovers; Likelihood ration test; Diagonal BEKK; Full BEKK; Dynamic hedging;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • P28 - Economic Systems - - Socialist Systems and Transition Economies - - - Natural Resources; Environment
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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