Volatility spillovers between energy market and carbon market: The TVP-SV-VAR and DCC-GARCH-Connectedness approaches.

This study utilizes energy futures and EUA futures settlement price data from 2009 to 2024 to examine the responses of energy and carbon markets to volatility shocks and their volatility spillover relationships. Based on the logarithmic conditional volatility series of return series computed by the univariate GARCH (1, 1) model, a TVP-SV-VAR model is constructed to identify the time-varying responses of volatility shocks between energy futures and EUA futures. Within the DCC-GARCH framework, the volatility impulse response function (VIRF) and generalized forecast error variance decomposition (GFEVD) are employed to compute volatility spillover index, thereby analyzing volatility spillovers between energy and carbon markets. The study finds that the responses of energy and carbon markets to volatility shocks and the intensities of volatility spillovers between them, exhibit time-varying characteristics driven by energy supply shocks, reforms of the EU ETS, EU energy policies, and extreme events. During the 2009-2019 period, EUA futures served as the primary net transmitter of volatility spillovers. In the COVID-19 outbreak, increased financial risks and macroeconomic uncertainties led to a rapid surge in the net volatility spillover intensity of crude oil futures. Energy supply shock induced by the Russia-Ukraine war substantially expanded contribution share of coal futures to volatility spillovers.