Dynamic risk spillover and hedging efficacy of China’s carbon-energy-finance markets: Economic policy uncertainty and investor sentiment non-linear causal effects

This study evaluates the risk spillover and hedging performance of China’s carbon-energy-finance markets system before and after its establishment of national unified carbon market by employing TVP-VAR-DY model framework. And we analyze the non-linear causal effects of economic policy uncertainty (EPU) and investor sentiment on the net risk spillover of the carbon-energy-finance markets. The findings indicate that carbon-energy-finance spillovers demonstrate time-varying, asymmetric，and heterogeneous features. Hedging other market risks through a portfolio with a short carbon position is typically associated with lower costs and enhanced hedging efficiency. EPU has a significant and sustained impact on risk spillovers within the carbon and natural gas, and bond markets; similarly, investor sentiment maintains a substantial and consistent impact on risk spillovers among the carbon, natural gas, and coal markets.