Dynamic tail dependence on China's carbon market and EU carbon market

Abstract

This study explores the dynamic relationship between the European carbon emission price (EUA) and the Shenzhen carbon emission price (SZA) in the time and frequency domain. Since they represent major carbon emission rights prices in the markets, they show a close correlation and tail correlation between them. Given the current global implementation to reduce carbon economy and China's implementation of a dual-carbon policy, it is of great value to explore the dynamic relationship between the two major carbon markets. Firstly, this paper uses a wavelet method to decompose the returned sequence into different frequency components to certify the dependent construction under different time scales. Secondly, this paper uses a wide range of static and time-varying link functions to describe the tail-dependent. The empirical results show that under different time scales, the dependence construction between EUA and SZA has significant time variation. The results of this study have important policy implications for understanding the transmission of carbon prices between different markets, as well as for investors and policy makers.

Keywords

• tail dependence
• carbon market
• wavelet
• copula