Time–frequency analysis of the interaction mechanism between European carbon and crude oil markets

Abstract

The joint behavior of internal and external system brings out a high complexity of the carbon and oil price interactions, such as non-linearity and multi-frequency. This paper innovatively proposed a time-frequency mechanism between carbon and oil markets from the two aspects of internal system and external factors, and introduced a novelty partial wavelet analytics to explore their dynamic multi-scale interactions. We selected the European carbon and Brent oil futures prices data from March 2009 to December 2020, with the consideration of several necessary control variables from the external surroundings. Our findings point to a stable and strong in-phase relationship between the two markets, with oil leading at medium and lower frequencies. However, the mutual leading relationships are especially sensitive during abnormal political events and periods of financial recession and global emergency, which are observed at different periods for intermediate horizons. What is more, the interactions are more diversified and feebler at short-timescale. Under the vision of carbon neutrality, these evidences provide invaluable guidance for regulators to structure a more flexible adjusting mechanism for the risk control of carbon markets, and also help investors to hedge risk aimed at different time horizons.

High-Order Moment Contagion of the Carbon Market: A Heterogeneity Analysis of Market Volatility Trend

“…e time-varying and directional spillover between carbon and energy markets have detected the electricity market is the main net information receiver affected by the carbon market [27]. Additionally, the complex time-frequency and neural network mechanism between carbon and oil markets has been explored by the model of novelty partial wavelet and deep learning models [28][29][30].…”

Forecasting China carbon price using an error-corrected secondary decomposition hybrid model integrated fuzzy dispersion entropy and deep learning paradigm

“…Global warming is closely related to the carbon emissions, while the increasing carbon emissions are originated from rapid economic development and industrial advancement (Wu et al 2021;Nazifi and Milunovich 2010). Limiting the global warming to 1.5 o C is the most ambitious goal of the Paris Agreement signed in 2015, however, this goal is almost impossible at the current level of carbon emissions.…”

Does COVID-19 pandemic event alter the dependence structure breaks between crude oil and stock markets in Europe and America

“…Special market situation, geopolitical risks, macroeconomic fundamentals and domestic policies influence significantly time-varying dependences and risk spillovers between crude oil and stock returns in all the BRICS countries ( Wei et al, 2019 , Ji et al, 2020a , Ji et al, 2020b , Li et al, 2020 ). The mutual leading relationships of both European carbon (melta) and crude oil markets are especially sensitive during abnormal political events and periods of financial recession and global emergency ( Kaushik, 2018 , Wu et al, 2021 ).…”