Asymmetric risk spillover between financial market uncertainty and the carbon market: A GAS-DCS-copula approach

A thorough understanding the asymmetry in risk-transferring mechanisms remains a challenge in the carbon market. Through the incorporation of the asymmetric tail distribution into the risk-transferring mechanism, the asymmetric response of the carbon market to financial market uncertainties can be explored. Herein, we propose a generalized autoregressive score-dynamic conditional score-Copula model to investigate the asymmetric risk spillover between financial market uncertainty and the carbon market. We discover the existence of considerable asymmetric risk spillover from financial market uncertainty to the carbon market. Specifically, the upper tail risk spillover effect is greater than the lower tail risk spillover effect. The degree of risk spillover reached a peak during the European debt crisis. Also, higher degrees of financial market uncertainty, and especially uncertainty from the crude oil market, cause a greater risk spillover to the carbon market than lower degrees of financial market uncertainty do. In addition, we discover that stock market uncertainty exhibits greater power than crude oil market uncertainty in transferring risk to the carbon market when systemic events occur. Our research provides meaningful information to investors and policy makers. (C) 2020 Elsevier Ltd. All rights reserved.