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Nexus between carbon, stock, and energy markets in New Zealand: An analysis of causal domains

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  • Tao, Miaomiao
  • Poletti, Stephen
  • Sheng, Mingyue Selena
  • Wen, Le

Abstract

In the context of Industry 4.0 and the urgent need for a decarbonization transition, the Emissions Trading Scheme (ETS) emerges as a vital and cost-effective tool for promoting global decarbonization. While the connections between the ETS, stock, and the energy markets are theoretically strong, the nature of their causality has been a subject of debate in existing research, especially in New Zealand (NZ). Therefore, we quantitatively explore the potential dynamic linkages within the “Carbon-Stock-Energy” system using more advanced techniques, such as nonparametric Granger causality-in-quantile and cross-quantilogram techniques. Our findings attest to a bidirectional causality between the ETS and the markets examined in the short run. The foreseeability of all lag lengths is, moreover, positive in a bullish market context. Thus, price movements in the NZ ETS could contribute to the volatility of price variations in the stock and the energy markets. Fundamentally, the outcomes of the freshly devised regime-dependent portfolio strategy call for strategic investors to switch their portfolios adaptively between short-term and long-term positions in the ETS. In short, the outcomes may give a deeper glimpse into the complex interconnections between the ETS, stock, and the energy markets in NZ.

Suggested Citation

  • Tao, Miaomiao & Poletti, Stephen & Sheng, Mingyue Selena & Wen, Le, 2024. "Nexus between carbon, stock, and energy markets in New Zealand: An analysis of causal domains," Energy, Elsevier, vol. 299(C).
    • Handle: RePEc:eee:energy:v:299:y:2024:i:c:s0360544224011824
    DOI: 10.1016/j.energy.2024.131409
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