Spillover effect between carbon spot and futures market: evidence from EU ETS
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RESEARCH ARTICLE
Spillover effect between carbon spot and futures market: evidence from EU ETS Jian Liu 1 & Shuai Tang 1 & Chun-Ping Chang 2 Received: 4 September 2020 / Accepted: 12 November 2020 # Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract The spillover effects of European Union Allowances (EUA) spot and futures markets are important for investors in order to understand the relevance and risk management of product prices. This paper uses non-linear methods of Granger causality to test the mean spillover relationship between the two markets and then analyzes volatility spillovers between the two by the non-linear TVP-VAR spillover index. The results show that (1) the non-linear Granger causality test better reflects the mean spillover relationship between EUA spot and futures; (2) there is a bidirectional non-linear mean spillover effect between EUA spot and futures prices for the European Union Emissions Trading Scheme (EU ETS) phases II and III; and (3) volatility spillovers, appearing in EUA spot and future markets in both phases, work increasingly strong over time and are vulnerable to financial crises and extreme events. Keywords EUA . Spot . Futures . Mean spillover . Volatility spillover JEL C32 . D40 . G14
Introduction Established in 2005, the European Union Emissions Trading Scheme (EU ETS) is the world’s longest running carbon trading market whose main trading products are European Union allowance (EUA) spot and futures. The prices of the two are heavily influenced by the same factors, such as energy prices, social events, climate conditions, policy changes, and so on (Conrad et al. 2012; Liu et al. 2017a, b). Both fluctuate violently and can present a simultaneous rise and fall. For example, in December 2007, prices for EUA spot and futures in nearest contracts are close to 0 € per ton, and in January 2008, they jumped to around 23 € per ton, while in December 2012, they fell to 6.5 € per ton. In fact, such correlations are the Responsible Editor: Nicholas Apergis * Chun-Ping Chang [email protected] 1
School of Economics and Management, Changsha University of Science and Technology, Changsha 410114, Hunan, People’s Republic of China
2
Shih Chien University Kaohsiung Campus, Kaohsiung, Taiwan
outward manifestation of spillovers among markets which include mean spillover effect as well as volatility spillover effect. The former indicates market price changes’ influence on other market prices, and the latter reflects the influence of changes of the market price fluctuation rate on other market price fluctuations (Xiong and Han 2013; Yuan and Qi 2019). Not only is the lead-lag relationship explained between EUA spot and futures prices by the spillover effect to some extent, it also better analyzes the transmission path and direction of risks between the two markets, reflecting their flow process and interaction (Wang and Wang 2012). A large amount of literature has found that carbon spot markets greatly relates to the future markets. First of all, some scholars pointed ou
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