Impact of Covid-19 on Returns-Volatility Spillovers in National and Regional Carbon Markets in China

60 Pages Posted: 1 Apr 2022

See all articles by Te-Ke Mai

Te-Ke Mai

Guangdong University of Finance

Aoife Foley

The University of Manchester

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Chia-Lin Chang

National Chung Hsing University - Department of Applied Economics, Department of Finance

Abstract

China wants to play a leading role in international carbon reduction and has ambitious reduction plans. National and regional carbon emissions markets now have increasing trading volumes to operate efficiently. However, trade wars and the COVID-19 pandemic may have created challenges for the Chinese government to create a competitive national market. As carbon emissions are now a key policy instrument and important financial asset, it is important to analyze volatility spillovers, as one of the largest carbon emitters globally makes an interesting case study. Here we investigate daily data for China’s carbon markets and analyzes prices, returns, and volatility spillovers. The Diagonal BEKK model is used to examine financial returns and determine conditional covariances and volatility spillovers across the national and regional markets before, during and after COVID-19. The empirical results show that the signs of the conditional means and covariances, and partial covolatility spillovers for regional returns are similar before and during COVID-19, but not for national returns. Moreover, the magnitudes of the spillovers during COVID-19 are much larger than before and after COVID-19. The impact of COVID-19 on China’s economy leads to greater risk transmission across carbon markets. The channels of risk transmission are discussed to help understand the relevance of carbon markets for investment decisions and public policy making. China’s experience (from regional to national) will be useful in informing any international carbon markets. Finally, motivations, challenges and possible forms of cooperation between China and the Euro zone on establishing a common carbon market are discussed.

Keywords: Carbon Markets, China, Diagonal BEKK, Volatility, spillovers, Risk, COVID-19, Euro zone

Suggested Citation

Mai, Te-Ke and Foley, Aoife and McAleer, Michael and Chang, Chia-Lin, Impact of Covid-19 on Returns-Volatility Spillovers in National and Regional Carbon Markets in China. Available at SSRN: https://ssrn.com/abstract=4070424 or http://dx.doi.org/10.2139/ssrn.4070424

Te-Ke Mai

Guangdong University of Finance ( email )

Yingfu Road 527, Longdong
Tianhe District
Guangzhou, Guangdong 510521
China

Aoife Foley

The University of Manchester ( email )

The University of Manchester
Oxford Rd
Manchester, M13 9PL
United Kingdom
+447721741550 (Phone)

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute ( email )

Rotterdam
Netherlands

Tinbergen Institute

Rotterdam
Netherlands

University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Tokyo
Japan

Chia-Lin Chang (Contact Author)

National Chung Hsing University - Department of Applied Economics, Department of Finance ( email )

Taichung, Taiwan
China

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
26
Abstract Views
211
PlumX Metrics