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HEIndividual fellowship2022–2025

ECS · Dependencies and volatility spillovers among carbon, energy, and stock markets in the EU

Horizon Europe — Marie Skłodowska-Curie Actions

Duration
2022-12-15 → 2025-03-14
EU contribution
€172,750
Participants
1
Scheme
HORIZON-TMA-MSCA-PF-EF

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Results in brief

Dependencies and volatility spillovers among carbon, energy, and stock markets in the EU

The research focuses on understanding the interconnections and spillover effects between carbon, energy, metal, and financial markets within the European Union Emissions Trading System (EU-ETS). Given the growing importance of carbon pricing in mitigating climate change, this study aims to provide a comprehensive analysis of market dynamics influencing the EU-ETS. The primary objectives are: - To analyze the causality direction and dependency structure between carbon allowances (EUA) and key market assets such as oil, gas, coal, metals (gold, silver, copper), and financial indices (EuroStoxx600). - To explore how these relationships evolve over different trading phases of the EU-ETS (from 2005 to 2022). - To quantify time-varying spillovers and volatility transmission mechanisms affecting carbon markets. - To offer policy-relevant insights that can help in designing more resilient carbon pricing strategies. To achieve these goals, the study employs advanced econometric techniques, including Directed Acyclic Graph (DAG) analysis, Canonical Vine Copula (C-Vine) models, and Time-Varying Parameter Vector Auto Regressive models with Stochastic Volatility (TVP-VAR-SV). By integrating these methodologies, the research aims to provide a novel perspective on the interconnectedness of the EU carbon market with broader economic and financial variables​

Data: CORDIS, © European Union

Project objective

The EU is now on course to accomplish its 2020 climate and energy targets, and has finalized the regulatory framework required to attain its 2030 and 2050 emissions reduction goals. The EU Emission Trading System (ETS) was established in 2005 with the objective of limiting global warming and maintaining a balance between economic development and environmental protection. Financial and energy markets are the main driving forces of the prices of the carbon future market. It's also conceivable that shocks to driving forces have an impact on EUA pricing. As far now, price formation in the ETS, the consequences of structural changes on market linkages, and co-movement between the markets across different trading phases of EU ETS remain widely unexplored. Hence, the goal of this study is to explore the dynamic causal relationship, price spillovers, and dependencies among carbon-energy-stock markets during 2005-2021. To achieve this objective, it is essential to investigate the stationarity and structural breaks of variables by ADF, PP, KPSS, and ZA tests. To design a network causal relationship, directed acyclic graphs (DAG) as an alternative data-based approach will be used to modeling and analyzing contemporaneous causality patterns. Then, a Time-Varying Parameter VAR model (TVP-VAR) will be applied to discuss the volatility spillover effects. For multi-dimensional analysis, Vine Copulas, including R-Vine, C-Vine, and D-Vine models will be applied. The EUA daily future price from, stock market indices (DAX, FTSE100, CAC40, FTSE MIB, IBEX35, Euro stoxx50, respectively), and energy prices for Brent oil and gas will be utilized for a sample period (2005-2021). Novel outcomes from the study could be explored for three phases of the EU ETS. The study determines whether there are any relationships or volatility spillover effects among the markets. Dependency analysis will quantify the correlations and reveal the impact of energy and financial markets on the carbon market.

Original text from CORDIS.

Participants

  • FONDAZIONE ENI ENRICO MATTEI · MilanoCoordinatorItaly

Links

Data: CORDIS, © European Union