IDEAS home Printed from https://ideas.repec.org/a/wly/ijfiec/v29y2024i2p2155-2175.html
   My bibliography  Save this article

Extreme risk spillovers across energy and carbon markets: Evidence from the quantile extended joint connectedness approach

Author

Listed:
  • Guangxi Cao
  • Fei Xie

Abstract

Extreme events have further complicated the already closely related carbon‐energy system, but little research has focused on the extreme spillovers between energy and carbon markets. This paper combines quantile vector autoregression with the extended joint connectedness approach to introduce a new quantile extended joint connectedness approach to study the extreme spillover between the carbon market, fossil energy and clean energy markets, using daily data spanning from October 15, 2010 to February 25, 2022. The results show that markets are more closely linked at extreme risk, and the spillover is time‐varying and cyclical. The impact of extreme events will strengthen the links between markets. Further research shows different clean energy have heterogeneous spillovers on the carbon market, especially when impacted by extreme events. Finally, the hedging and portfolio effectiveness of clean energy to carbon market also show the existence of heterogeneity, and clean energy can diversify the portfolio of carbon market.

Suggested Citation

  • Guangxi Cao & Fei Xie, 2024. "Extreme risk spillovers across energy and carbon markets: Evidence from the quantile extended joint connectedness approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 2155-2175, April.
    • Handle: RePEc:wly:ijfiec:v:29:y:2024:i:2:p:2155-2175
    DOI: 10.1002/ijfe.2781
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/ijfe.2781
    Download Restriction: no
    File URL: https://libkey.io/10.1002/ijfe.2781?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Hanif, Waqas & Arreola Hernandez, Jose & Mensi, Walid & Kang, Sang Hoon & Uddin, Gazi Salah & Yoon, Seong-Min, 2021. "Nonlinear dependence and connectedness between clean/renewable energy sector equity and European emission allowance prices," Energy Economics, Elsevier, vol. 101(C).
    2. Diebold, Francis X. & Yılmaz, Kamil, 2014. "On the network topology of variance decompositions: Measuring the connectedness of financial firms," Journal of Econometrics, Elsevier, vol. 182(1), pages 119-134.
    3. Mert Demirer & Francis X. Diebold & Laura Liu & Kamil Yilmaz, 2018. "Estimating global bank network connectedness," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(1), pages 1-15, January.
    4. Chatziantoniou, Ioannis & Gabauer, David & Stenfors, Alexis, 2021. "Interest rate swaps and the transmission mechanism of monetary policy: A quantile connectedness approach," Economics Letters, Elsevier, vol. 204(C).
    5. Balcılar, Mehmet & Demirer, Rıza & Hammoudeh, Shawkat & Nguyen, Duc Khuong, 2016. "Risk spillovers across the energy and carbon markets and hedging strategies for carbon risk," Energy Economics, Elsevier, vol. 54(C), pages 159-172.
    6. Saeed, Tareq & Bouri, Elie & Alsulami, Hamed, 2021. "Extreme return connectedness and its determinants between clean/green and dirty energy investments," Energy Economics, Elsevier, vol. 96(C).
    7. Christoffersen, Peter & Errunza, Vihang & Jacobs, Kris & Jin, Xisong, 2014. "Correlation dynamics and international diversification benefits," International Journal of Forecasting, Elsevier, vol. 30(3), pages 807-824.
    8. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
    9. Lastrapes, William D. & Wiesen, Thomas F.P., 2021. "The joint spillover index," Economic Modelling, Elsevier, vol. 94(C), pages 681-691.
    10. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
    11. Francis X. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, January.
    12. Bouri, Elie & Saeed, Tareq & Vo, Xuan Vinh & Roubaud, David, 2021. "Quantile connectedness in the cryptocurrency market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
    13. Creti, Anna & Jouvet, Pierre-André & Mignon, Valérie, 2012. "Carbon price drivers: Phase I versus Phase II equilibrium?," Energy Economics, Elsevier, vol. 34(1), pages 327-334.
    14. Kuang, Wei, 2021. "Which clean energy sectors are attractive? A portfolio diversification perspective," Energy Economics, Elsevier, vol. 104(C).
    15. Aatola, Piia & Ollikainen, Markku & Toppinen, Anne, 2013. "Impact of the carbon price on the integrating European electricity market," Energy Policy, Elsevier, vol. 61(C), pages 1236-1251.
    16. Jarque, Carlos M. & Bera, Anil K., 1980. "Efficient tests for normality, homoscedasticity and serial independence of regression residuals," Economics Letters, Elsevier, vol. 6(3), pages 255-259.
    17. Syed Jawad Hussain Shahzad & Elie Bouri & Ladislav Kristoufek & Tareq Saeed, 2021. "Impact of the COVID-19 outbreak on the US equity sectors: Evidence from quantile return spillovers," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-23, December.
    18. Fernanda Fuentes & Rodrigo Herrera, 2020. "Dynamics of Connectedness in Clean Energy Stocks," Energies, MDPI, vol. 13(14), pages 1-19, July.
    19. Jozef Baruník & Tomáš Křehlík, 2018. "Measuring the Frequency Dynamics of Financial Connectedness and Systemic Risk," Journal of Financial Econometrics, Oxford University Press, vol. 16(2), pages 271-296.
    20. Tiwari, Aviral Kumar & Aikins Abakah, Emmanuel Joel & Gabauer, David & Dwumfour, Richard Adjei, 2022. "Dynamic spillover effects among green bond, renewable energy stocks and carbon markets during COVID-19 pandemic: Implications for hedging and investments strategies," Global Finance Journal, Elsevier, vol. 51(C).
    21. Dutta, Anupam & Bouri, Elie & Noor, Md Hasib, 2018. "Return and volatility linkages between CO2 emission and clean energy stock prices," Energy, Elsevier, vol. 164(C), pages 803-810.
    22. Pham, Linh, 2019. "Do all clean energy stocks respond homogeneously to oil price?," Energy Economics, Elsevier, vol. 81(C), pages 355-379.
    23. Demiralay, Sercan & Gencer, Hatice Gaye & Bayraci, Selcuk, 2022. "Carbon credit futures as an emerging asset: Hedging, diversification and downside risks," Energy Economics, Elsevier, vol. 113(C).
    24. Kroner, Kenneth F. & Sultan, Jahangir, 1993. "Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(4), pages 535-551, December.
    25. Su, Xianfang, 2020. "Measuring extreme risk spillovers across international stock markets: A quantile variance decomposition analysis," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    26. Tomohiro Ando & Matthew Greenwood-Nimmo & Yongcheol Shin, 2022. "Quantile Connectedness: Modeling Tail Behavior in the Topology of Financial Networks," Management Science, INFORMS, vol. 68(4), pages 2401-2431, April.
    27. Uddin, Gazi Salah & Hernandez, Jose Areola & Shahzad, Syed Jawad Hussain & Hedström, Axel, 2018. "Multivariate dependence and spillover effects across energy commodities and diversification potentials of carbon assets," Energy Economics, Elsevier, vol. 71(C), pages 35-46.
    28. Liu, Zhenhua & Shi, Xunpeng & Zhai, Pengxiang & Wu, Shan & Ding, Zhihua & Zhou, Yuqin, 2021. "Tail risk connectedness in the oil-stock nexus: Evidence from a novel quantile spillover approach," Resources Policy, Elsevier, vol. 74(C).
    29. Elie Bouri & Kakali Kanjilal & Sajal Ghosh & David Roubaud & Tareq Saeed, 2021. "Rare earth and allied sectors in stock markets: extreme dependence of return and volatility," Applied Economics, Taylor & Francis Journals, vol. 53(49), pages 5710-5730, October.
    30. Nikolaos Antonakakis & Ioannis Chatziantoniou & David Gabauer, 2021. "The impact of Euro through time: Exchange rate dynamics under different regimes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1375-1408, January.
    31. Diebold, Francis X. & Yilmaz, Kamil, 2012. "Better to give than to receive: Predictive directional measurement of volatility spillovers," International Journal of Forecasting, Elsevier, vol. 28(1), pages 57-66.
    32. Kroner, Kenneth F & Ng, Victor K, 1998. "Modeling Asymmetric Comovements of Asset Returns," The Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 817-844.
    33. Tan, Xueping & Sirichand, Kavita & Vivian, Andrew & Wang, Xinyu, 2020. "How connected is the carbon market to energy and financial markets? A systematic analysis of spillovers and dynamics," Energy Economics, Elsevier, vol. 90(C).
    34. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
    35. Ahmad, Wasim & Sadorsky, Perry & Sharma, Amit, 2018. "Optimal hedge ratios for clean energy equities," Economic Modelling, Elsevier, vol. 72(C), pages 278-295.
    36. Thomas J. Fisher & Colin M. Gallagher, 2012. "New Weighted Portmanteau Statistics for Time Series Goodness of Fit Testing," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 107(498), pages 777-787, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bhuvaneskumar Annamalaisamy & Sivakumar Vepur Jayaraman, 2024. "Do cryptocurrencies integrate with the indices of equity, sustainability, clean energy, and crude oil? A wavelet coherency approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3372-3392, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cocca, Teodoro & Gabauer, David & Pomberger, Stefan, 2024. "Clean energy market connectedness and investment strategies: New evidence from DCC-GARCH R2 decomposed connectedness measures," Energy Economics, Elsevier, vol. 136(C).
    2. Chen, Jinyu & Liang, Zhipeng & Ding, Qian & Liu, Zhenhua, 2022. "Quantile connectedness between energy, metal, and carbon markets," International Review of Financial Analysis, Elsevier, vol. 83(C).
    3. Dang, Tam Hoang Nhat & Balli, Faruk & Balli, Hatice Ozer & Gabauer, David & Nguyen, Thi Thu Ha, 2024. "Sectoral uncertainty spillovers in emerging markets: A quantile time–frequency connectedness approach," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 121-139.
    4. Gong, Xiao-Li & Zhao, Min & Wu, Zhuo-Cheng & Jia, Kai-Wen & Xiong, Xiong, 2023. "Research on tail risk contagion in international energy markets—The quantile time-frequency volatility spillover perspective," Energy Economics, Elsevier, vol. 121(C).
    5. Abakah, Emmanuel Joel Aikins & Brahim, Mariem & Carlotti, Jean-Etienne & Tiwari, Aviral Kumar & Mensi, Walid, 2024. "Extreme downside risk connectedness and portfolio hedging among the G10 currencies," International Economics, Elsevier, vol. 178(C).
    6. Ziadat, Salem Adel & Mensi, Walid & Al-Kharusi, Sami & Vo, Xuan Vinh & Kang, Sang Hoon, 2024. "Are clean energy markets hedges for stock markets? A tail quantile connectedness regression," Energy Economics, Elsevier, vol. 136(C).
    7. Tiwari, Aviral Kumar & Aikins Abakah, Emmanuel Joel & Gabauer, David & Dwumfour, Richard Adjei, 2022. "Dynamic spillover effects among green bond, renewable energy stocks and carbon markets during COVID-19 pandemic: Implications for hedging and investments strategies," Global Finance Journal, Elsevier, vol. 51(C).
    8. Zhou, Yuqin & Wu, Shan & Zhang, Zeyi, 2022. "Multidimensional risk spillovers among carbon, energy and nonferrous metals markets: Evidence from the quantile VAR network," Energy Economics, Elsevier, vol. 114(C).
    9. Guangxi Cao & Fei Xie & Meijun Ling, 2022. "Spillover effects in Chinese carbon, energy and financial markets," International Finance, Wiley Blackwell, vol. 25(3), pages 416-434, December.
    10. Gabauer, David & Chatziantoniou, Ioannis & Stenfors, Alexis, 2023. "Model-free connectedness measures," Finance Research Letters, Elsevier, vol. 54(C).
    11. Lei, Heng & Xue, Minggao & Ye, Jing, 2024. "The nexus between ReFi, carbon, fossil energy, and clean energy assets: Quantile time–frequency connectedness and portfolio implications," Energy Economics, Elsevier, vol. 132(C).
    12. Ha, Le Thanh & Bouteska, Ahmed & Sharif, Taimur & Abedin, Mohammad Zoynul, 2024. "Dynamic interlinkages between carbon risk and volatility of green and renewable energy: A TVP-VAR analysis," Research in International Business and Finance, Elsevier, vol. 69(C).
    13. Demiralay, Sercan & Gencer, Hatice Gaye & Bayraci, Selcuk, 2022. "Carbon credit futures as an emerging asset: Hedging, diversification and downside risks," Energy Economics, Elsevier, vol. 113(C).
    14. Stenfors, Alexis & Chatziantoniou, Ioannis & Gabauer, David, 2022. "Independent policy, dependent outcomes: A game of cross-country dominoes across European yield curves," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    15. Hoque, Mohammad Enamul & Soo-Wah, Low & Billah, Mabruk, 2023. "Time-frequency connectedness and spillover among carbon, climate, and energy futures: Determinants and portfolio risk management implications," Energy Economics, Elsevier, vol. 127(PB).
    16. Bhattacherjee, Purba & Mishra, Sibanjan & Kang, Sang Hoon, 2024. "Extreme time-frequency connectedness across U.S. sector stock and commodity futures markets," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 1176-1197.
    17. Naeem, Muhammad Abubakr & Chatziantoniou, Ioannis & Gabauer, David & Karim, Sitara, 2024. "Measuring the G20 stock market return transmission mechanism: Evidence from the R2 connectedness approach," International Review of Financial Analysis, Elsevier, vol. 91(C).
    18. Wang, Yong & Liu, Shimiao & Abedin, Mohammad Zoynul & Lucey, Brian, 2024. "Volatility spillover and hedging strategies among Chinese carbon, energy, and electricity markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    19. Shang, Jin & Hamori, Shigeyuki, 2024. "Quantile time-frequency connectedness analysis between crude oil, gold, financial markets, and macroeconomic indicators: Evidence from the US and EU," Energy Economics, Elsevier, vol. 132(C).
    20. Patel, Ritesh & Gubareva, Mariya & Chishti, Muhammad Zubair & Teplova, Tamara, 2024. "Connectedness between healthcare cryptocurrencies and major asset classes: Implications for hedging and investments strategies," International Review of Financial Analysis, Elsevier, vol. 93(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:ijfiec:v:29:y:2024:i:2:p:2155-2175. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/1076-9307/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.