The time-varying effects of liquidity and market efficiency of the European Union carbon market: Evidence from the TVP-SVAR-SV approach

We use the time-varying parameter structural vector autoregression stochastic volatility (TVP-SVAR-SV) and causality-in-quantiles methods to explore the linkage between market liquidity and efficiency in the European Union Emissions Trading Scheme (EU ETS) during Phase III. Our results show that two-way causality existed under normal and lower market conditions. Additionally, the linkage between liquidity and efficiency exhibits time-varying characteristics. Except in cases of extremely high market liquidity, the pass-through effect of liquidity on efficiency is mostly positive in the long run. The linkage is stronger in the medium and long term, but the response of liquidity to efficiency shocks is more complicated. Market efficiency has an overall inhibitory effect on liquidity in the short term and a promoting effect in the medium and long term. Furthermore, we investigate the impulse response during the COVID-19 period and the war between Russia and Ukraine and find that improvements in efficiency will permanently damage liquidity. Overall, the abilities of market makers and arbitrage traders, impacted by multiple factors, play an important role in the process by which liquidity affects market efficiency. By revealing and explaining the dynamic relationship between liquidity and efficiency, this research provides valuable information for policymakers and various market participants.

The role of the COVID-19 pandemic in time-frequency connectedness between oil market shocks and green bond markets: Evidence from the wavelet-based quantile approaches.

This study contributes to the existing literature on the relationship between oil market shocks and the green bond market by investigating the impact of the COVID-19 pandemic on their dynamic correlation. We first decompose the oil market shocks into components using a time-frequency framework. Then, we combine wavelet decomposition and quantile coherence and causality methods to discuss changes during the COVID-19 era. We observe positive effects of both supply-driven and demand-driven oil shocks on the green bond market at most quantile levels. However, supply-driven oil price changes play a major role. The results also indicate that long-term changes have a greater impact than short-term changes on the connection between oil and green bond markets. Nevertheless, the COVID-19 pandemic changed the nature of the causal relationship, as we observed no relationship under extreme market conditions during the pandemic era. We argue that the economic and social impacts of the COVID-19 pandemic have left investors focusing on the short-term substitution between oil and green bond markets.

Can digital economic attention spillover to financial markets? Evidence from the time-varying Granger test

The digital economy is pervasive, all-encompassing, and a pan-industrial revolution. This paper pioneers constructing a digital economy concern index by extracting the web search volumes of keywords through crawler technology and analyzes the dynamic causal relationship with the Chinese stock markets via time-varying Granger tests. The results reveal that digital economy attention has a significant predictive effect on stock prices in a time-varying pattern and that the causal spillover varies across industry segments, with higher success rates and longer duration of causal detection under recursive algorithms. Moreover, the causal impact of digital economy attention on stock prices is generally limited in sluggish market states, mainly reflected during the COVID-19 pandemic and again after the epidemic had passed for some time with significant causality. This paper provides new evidence and analytical perspectives on the performance of the digital economy in financial markets, informing the digital transformation of various industries and investment decisions of investors.

Spillover effects among crude oil, carbon, and stock markets: evidence from nonparametric causality-in-quantiles tests

This study investigates the spillovers and information transmission between carbon, crude oil, and stock markets under various market conditions in Phase III of the EU ETS. For this purpose, we use a novel causality-in-quantiles test method and quantile impulse response functions based on daily data of carbon futures, Brent spot, and three representative equity indices in the Europe over the period from 27 January 2014 to 18 September 2020. We find that crude oil market has a unidirectional spillover effect on carbon market, and this causality is significant under normal to bullish market conditions. Furthermore, the causality-in-quantiles between crude oil and stock markets varies with specific equality index, and the information transmission from crude oil to stock market is strong in the normal stock market but invalid when stock markets become extremely bearish or bullish. The COVID-19 epidemic may cause structural changes in the oil-carbon and oil-stock nexus.

Asymmetric causality of economic policy uncertainty and oil volatility index on time-varying nexus of the clean energy, carbon and green bond

Vigorously developing the clean energy industry, improving the carbon allowance trading scheme, and issuing green bonds can effectively reduce emissions. To this end, this study aims to investigate the time-varying connections among clean energy, carbon, and green bonds through the DCC-MIDAS model, thus providing a bird's-eye view of their dynamic nexus. A non-parametric causality-in-quantile method is also employed to adequately capture the asymmetric causation of economic policy uncertainty (EPU) and the oil volatility index (OVX) on cross-asset correlations under different market conditions. The primary results imply complicated links among these three assets, with alternating positive and negative trends throughout the sample period. Notably, turbulence in financial markets can exacerbate network connectivity, particularly during the COVID-19 pandemic. Moreover, EPU and OVX can serve as strong predictors across various distributions of cross-market connections, which indicates that co-movement between assets is vulnerable to exogenous risks, especially under normal market conditions. Our findings have broader implications for market participants and policymakers.

Exploring the bidirectional causality between green markets and economic policy: evidence from the time-varying Granger test.

The vigorous development of green markets and the effective mitigation of economic policy fluctuations are current hotspots that intrigue our interest in exploring the causal relationships between green market returns and economic policy uncertainty (EPU). Green bonds, corporate environmental responsibility, green technology investment, and the carbon trading market are our research objects to comprehensively understand the interaction among them, from both macro and micro perspectives. Considering the importance of temporal heterogeneity and spillover direction in causation, we employ the time-varying Granger causality method to obtain bidirectional real-time identification. We find that green market returns exhibit a time-varying bidirectional causality with EPU over most of the sample period. In contrast, green markets are more a risk spillover than a recipient. Notably, this causality is vulnerable to exogenous financial risks, especially structural changes caused by the COVID-19 pandemic. Overall, this paper provides insights into the deep-seated causes of price fluctuations, volatile market uncertainty, and the interaction mechanism between them, as well as implications for market participants and policymakers.

Asymmetric effects of non-ferrous metal price shocks on clean energy stocks: Evidence from a quantile-on-quantile method

Combining advanced quantile-on-quantile (QQ) regression and causality-in-quantiles (QC) methods, we examine the asymmetric effects of non-ferrous metal price shocks on clean energy stocks at aggregate and sub-sector levels. From the aggregate perspective, the impact of non-ferrous metal price shocks is strongly negative for bull clean energy stock markets but is positive under bear circumstances. According to QC analysis, non-ferrous metal price shocks can effectively predict returns on clean energy stocks in some quantiles. Sub-sectors of clean energy stocks react differently, proving the heterogeneity of different industries. Synergistic movements between non-ferrous metal price shocks and some clean energy sectors in bear markets are detected, indicating that non-ferrous metals are not safe havens for clean energy stock markets under extreme market conditions. Furthermore, non-ferrous metals have a significantly stronger negative impact on clean energy stocks during the epidemic, demonstrating the structural changes effect of COVID-19.

Gold or Bitcoin, which is the safe haven during the COVID-19 pandemic?

This study compares the dynamic spillover effects of gold and Bitcoin prices on the oil and stock market during the COVID-19 pandemic via time-varying parameter vector autoregression. Both time-varying and time-point results indicate that gold is a safe haven for oil and stock markets during the COVID-19 pandemic. However, unlike gold, Bitcoin's response is the opposite, rejecting the safe haven property. Further analysis shows that the safe-haven effects of gold on the stock market become stronger when the pandemic critically spreads.

Dynamics of the sheltering role of Bitcoin against crude oil market crash with varying severity of the COVID-19: A comparison with gold.

This paper studies evolution of the asymmetric sheltering role of Bitcoin compared to gold against oil-related uncertainties with varying severity of the COVID-19 pandemic. Using a varying-coefficient quantile approach, we find a safe haven role of Bitcoin, and it becomes gradually stronger when the pandemic intensifies. The relationship between gold and oil markets is shown to vary with changing severity of the pandemic. We find that gold acts as an increasingly weakened diversifier as the pandemic intensifies until a level, above which its diversification gains would dissipate then. In normal market conditions, both Bitcoin and gold perform as weak hedges for oil portfolios. Our findings demonstrate that interpretation of the sheltering role of Bitcoin and gold against oil market downturns would be biased unless the role dynamics in different market conditions and pandemic severity are considered. Additional analyses reassure robustness of our findings.

Carbon prices forecasting in quantiles

This paper proposes two new methods (the Quantile Group LASSO and the Quantile Group SCAD models) to evaluate the predictability of a large group of factors on carbon futures returns. The most powerful predictors are selected through the dimension-reduction mechanism of the two models, while potential differences of the statistically significant predictors for different quantiles of carbon returns are carefully considered. First, we find that the proposed models outperform a series of competing ones with respect to prediction accuracy. Second, impacts of the selected predictors over the carbon price distribution are estimated through a quantile approach, which outperforms the mean shrinkage model in our case with data featured by a non-normal distribution. Specifically, the Brent spot price, the crude oil closing stock in the UK, and the growth of natural gas production in the UK are found to impact carbon futures returns only in extreme conditions with a strong asymmetric feature. Importantly, our estimators remain robust against the extreme event caused by the Covid-19. Our findings reveal that the identification of appropriate carbon return predictors and their impacts hinge on the carbon market conditions, and should be of interest to various stakeholders.