Extreme linkages of carbon futures, energy markets, and economic indicators: A copula approach

The interdependence of carbon allowances and different energy sources in extreme market behavior is still unsettled in the literature. Using different types of static and time-varying copulas, this piece of research aims to quantify the dependence structures of Europe-based carbon future returns and selected energy future returns (i.e. coal, electricity, oil, and natural gas), and to investigate whether or not these dependence structures are influenced by economic indicators. Our results show strong evidence that time-varying parameter copulas with extreme tails are the best fit to the dependence structure. We also find that the speculation activity and the uncertainty of the state of the global economy are two important components of this robust dependence structure in the period of oil price crises. These findings are relevant for the implementation of effective policies to make the carbon market operate more efficiently and stably.

Automated summary

This research aims to quantify the dependence structures between Europe-based carbon future returns and selected energy future returns, and determine if economic indicators have an influence on these structures. The results show strong evidence that time-varying parameter copulas with extreme tails are the best fit to the dependence structure. The speculation activity and uncertainty of the global economy are found to be important components of this robust dependence structure during oil price crises.