How does carbon market interact with energy and sectoral stocks? Evidence from risk spillover and wavelet coherence

As climate change becomes an important global issue and the global energy transformation accelerates, the complex risk transmission among carbon, energy, and stock markets is a concern. However, the majority of the existing studies are restricted to the time domain. This paper explores the risk spillovers of carbon, energy, and sectoral stock markets based on the time-frequency spillover approaches. Furthermore, wavelet coherence is employed to analyze the time-frequency dependence between markets. The findings suggest that there is a strong connectedness among carbon, energy, and sectoral stock markets, with significant differences in risk spillover at different frequencies. The carbon and energy markets are the net recipients of risk spillovers, while the industrial goods and services and financial services sectors act as the dominant risk transmitters. The crisis events have intensified the risk spillover magnitude. These results provide suggestions for risk management and asset allocation.