Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/177619
Authors: 
Chang, Chia-Lin
McAleer, Michael
Zuo, Guangdong
Year of Publication: 
2017
Series/Report no.: 
Tinbergen Institute Discussion Paper 17-051/III
Abstract: 
Recent research shows that efforts to limit climate change should focus on reducing emissions of carbon dioxide over other greenhouse gases or air pollutants. Many countries are paying substantial attention to carbon emissions to improve air quality and public health. The largest source of carbon emissions from human activities in some countries in Europe and elsewhere is from burning fossil fuels for electricity, heat, and transportation. The price of fuel influences carbon emissions, but the price of carbon emissions can also influence the price of fuel. Owing to the importance of carbon emissions and their connection to fossil fuels, and the possibility of Granger (1980) causality in spot and futures prices, returns and volatility of carbon emissions, it is not surprising that crude oil and coal have recently become a very important research topic. For the USA, daily spot and futures prices are available for crude oil and coal, but there are no daily spot or futures prices for carbon emissions. For the EU, there are no daily spot prices for coal or carbon emissions, but there are daily futures prices for crude oil, coal and carbon emissions. For this reason, daily prices will be used to analyse Granger causality and volatility spillovers in spot and futures prices of carbon emissions, crude oil, and coal. A likelihood ratio test is developed to test the multivariate conditional volatility Diagonal BEKK model, which has valid regularity conditions and asymptotic properties, against the alternative Full BEKK model, which has valid regularity conditions and asymptotic properties under the null hypothesis of zero off-diagonal elements. Dynamic hedging strategies using optimal hedge ratios will be suggested to analyse market fluctuations in the spot and futures returns and volatility of carbon emissions, crude oil and coal prices.
Subjects: 
Carbon emissions
Fossil fuels
Crude oil
Coal
Low carbon targets
Green energy
Spot and futures prices
Granger causality and volatility spillovers
Likelihood ration test
Diagonal BEKK
Full BEKK
Dynamic hedging
JEL: 
C58
L71
O13
P28
Q42
Document Type: 
Working Paper

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