Multiscale interplay of higher-order moments between the carbon and energy markets during Phase III of the EU ETS

Journal article

Dai, X., Xiao, L., Wang, Q. and Dhesi, G. (2021). Multiscale interplay of higher-order moments between the carbon and energy markets during Phase III of the EU ETS. Energy Policy. 156, p. 112428. https://doi.org/10.1016/j.enpol.2021.112428
AuthorsDai, X., Xiao, L., Wang, Q. and Dhesi, G.
Abstract

The Phase III of the European Union Emission Trading System (EU ETS) is significantly different from the previous Phases in terms of price trajectory and operational mechanism. Against this background, this study reveals the multiscale interplay of higher-order moments (skewness and kurtosis) between the carbon and energy markets, and formulates optimal portfolio strategies to manage higher-order moments risks at different time horizons. We detect a breakpoint, September 15, 2016, in the carbon-energy markets which divides Phase III into two stages corresponding to different market status. Our findings show that the bidirectional higher-order moments spillovers between the carbon and energy markets are weak at the short-run timescales (below 16 trading days), while the long-run (over 16 trading days) higher-order spillover effect is greatly enhanced. In particular, we find the spillovers in the higher-order moments are strong when the carbon and energy markets are in bullish status. Furthermore, we demonstrate that carbon assets are good short-run hedge against exposure to spillover risks in higher-order moments of the energy markets, while the hedging effectiveness declines at the long-run timescales.

Year2021
JournalEnergy Policy
Journal citation156, p. 112428
PublisherElsevier
Digital Object Identifier (DOI)https://doi.org/10.1016/j.enpol.2021.112428
Publication dates
Print14 Jul 2021
Publication process dates
Accepted14 Jun 2021
Deposited10 Aug 2021
Accepted author manuscript
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Open
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