Spillover effects in Chinese carbon, energy and financial markets

Abstract

As China's carbon market continues to develop, its close connection with the financial and energy markets is becoming increasingly apparent. A systematic study of the spillover effects between markets is important, as it can help prevent excessive fluctuations in carbon prices. With this in mind, this study proposes a time-varying parameter vector autoregression with Lanne–Nyberg decomposition extended joint connectedness approach to analyze quantitatively the spillover effects in the “carbon–energy–financial” system. Empirical results show that a bidirectional spillover effect exists among markets. Not only does the carbon market have the most pronounced return (volatility) linkages with the natural gas (clean energy) market, but the information connected with the energy markets is also more closely linked than with the financial markets. We also find that market fluctuations, caused by the China–US trade conflict and the COVID-19 pandemic, have increased spillovers in the system.