Association between the energy and emission prices: An analysis of EU emission trading system

Previous studies have focused on the co-movements between the prices of different types of energy and, to some extent, the co-movements between the energy and financial assets prices, falling short of analysing the co-movements between the different types of energy and emission price. In this study, using the daily data from November 2007-31st October 2017 on quotes of Brent Crude oil and Natural Gas spot returns and quotes of the EU-ETS spots, we employed a time-varying copulas connection function to assess the risk dependency relationship between ETS and energy prices. The results show that there is an asymmetry dependence change rule between ETS, oil and gas spot index, with the correlation of the lower tail significantly higher than that of the upper tail. These findings indicate that, with the use of time-varying SJC Copulas model, economic agents can control investment risk and forecast abnormal fluctuations in oil prices.