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Journal article
Risk spillovers across the energy and carbon markets and hedging strategies for carbon risk
Energy economics, v 54, pp 159-172
Feb 2016
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
This study examines the risk spillovers between energy futures prices and Europe-based carbon futures contracts. We use a Markov regime-switching dynamic correlation, generalized autoregressive conditional heteroscedasticity (MS-DCC-GARCH) model in order to capture the time variations and structural breaks in the spillovers. We further evaluate the optimal weights, hedging effectiveness, and dynamic hedging strategies for the MS-DCC-GARCH model based on both the regime-dependent and regime-independent optimal hedge ratios. We finally complement our analysis by examining the in- and out-of sample hedging performances for alternative strategies. Our results mainly show significant volatility and time-varying risk transmission from energy markets to carbon market. We also find that spot and futures segments of the emission markets exhibit time-varying correlations and volatile hedging effectiveness. The subsample estimates show significant changes in the hedge effectiveness over the different phases of the European carbon market. These results have important investment and policy implications.
•Risk spillovers between energy and carbon futures prices are studied.•We make use of a Markov regime-switching DCC-GARCH.•Optimal weights, hedging effectiveness, and dynamic hedging strategies are evaluated.•There exists significant time-varying risk transmission from energy to carbon markets.•Carbon spot and futures segments exhibit volatile hedging effectiveness.
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Details
- Title
- Risk spillovers across the energy and carbon markets and hedging strategies for carbon risk
- Creators
- Mehmet Balcılar - Eastern Mediterranean University, Famagusta, North Cyprus, TurkeyRıza Demirer - Southern Illinois University EdwardsvilleShawkat Hammoudeh - Drexel UniversityDuc Khuong Nguyen - IPAG Business School
- Publication Details
- Energy economics, v 54, pp 159-172
- Publisher
- Elsevier
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Web of Science ID
- WOS:000371942000015
- Scopus ID
- 2-s2.0-84951731273
- Other Identifier
- 991019167996304721
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- Collaboration types
- Domestic collaboration
- International collaboration
- Web of Science research areas
- Economics