A study on the volatility spillovers, long memory effects and interactions between carbon and energy markets: The impacts of extreme weather

a r t i c l e i n f o Due to the connections of energy uses, carbon emissions and climate, this study investigates the interactions, volatility spillovers, and long memory effects for carbon, oil, natural gas and coal markets by using FIEC-HYGARCH model. It also discusses the mediating effect of extreme weather. The empirical results verify that the FIEC-HYGARCH model can capture the long-term volatility behavior. The futures returns of carbon and energy have long memory and own-mean spillover effects. Moreover, the conditional variances also have volatility spillovers, long memory effects and amplitudes. Hence, there exist dynamic interrelationships among the futures returns of carbon and energy. Further, it also extends the long memory and causes various spillover effects by incorporating extreme weather into the model, indicating that extreme weather has certain impacts on carbon, oil, natural gas and coal markets. The problem of CO 2 emissions from fossil fuel uses (oil, natural gas, and coal), has caused a great deal of concerns around the world. In order to control carbon dioxide emissions, the carbon market has developed since 2005 based on the mechanisms of the Kyoto Protocol. The carbon price is affected by carbon emissions, which implies that energy prices have certain impacts on it. Moreover, information shocks may lead to any fluctuations in these markets, thus the information transmission and spillover effect cannot be ignored. In general, the prices are not reflected immediately by news or a shock, which implies that past long-lagged prices may still have strong influences on today's prices (i.e. long memory). Furthermore, abnormal weather leads to more energy uses and higher CO 2 emissions, which may reflect on carbon and energy prices. Therefore, this study tries to investigate the interactions, volatility spillovers, and long memory effects between carbon and energy markets by using FIEC-HYGARCH model, and the impacts of extreme weather are also taken into consideration. Human beings have consumed a large amount of fossil fuels and altered the use of land to improve their economic activities since the Industrial Revolution. Moreover, other human activities, such as deforestation and burning waste, have changed the lifestyle of individuals and the environment. These human activities have caused a serious problem, greenhouse effect, which brings various impacts on the environment , such as climate change. Although these changes have made humans become richer, the environment has also been harmed severely due to the greenhouse effect. The …