Alarming contagion effects: the dangerous ripple effect of extreme price spillovers across crude oil, carbon emission allowance, and agriculture futures markets

Wei, Yu, Wang, Yizhi, Vigne, Samuel A. and Ma, Zhenyu 2023. Alarming contagion effects: the dangerous ripple effect of extreme price spillovers across crude oil, carbon emission allowance, and agriculture futures markets. Journal of International Financial Markets, Institutions and Money 88 , 101821. 10.1016/j.intfin.2023.101821

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Abstract

The inherent financial interconnections between crude oil prices, carbon emission allowances, and agriculture commodity futures warrant a thorough investigation as fossil energy consumption, carbon emissions, and agriculture plants are three critical components of global environmental protection. This paper aims to quantify not only the normal (mean quantile) static and dynamic spillover effects among them in both time and frequency domains but also the more critical extreme spillovers that occur across various time horizons. Additionally, we explore the vital role of carbon futures in hedging risk and enhancing the performance of oil and agricultural portfolios. Empirical results indicate that, under extreme market situations, the total spillovers among oil, carbon, and agriculture commodity futures are much larger than those under normal conditions. Furthermore, soybean and corn are generally the most potent information transmitters over other futures in the time domain, while carbon emission allowance futures act as an obvious spillover receiver at both normal and extreme market conditions across various time frequencies. Both the total spillover and the net spillover are centred at a short-term frequency (i.e., one to four weeks). Finally, we find that carbon futures can contribute to improving the hedge effectiveness and performance of oil and agricultural portfolios. These findings have valuable implications for policymakers, relevant producers/consumers, as well as futures investors.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Additional Information:	License information from Publisher: LICENSE 1: URL: http://creativecommons.org/licenses/by/4.0/, Start Date: 2023-08-18
Publisher:	Elsevier
ISSN:	1042-4431
Date of First Compliant Deposit:	21 August 2023
Date of Acceptance:	14 August 2023
Last Modified:	02 Jan 2024 12:26
URI:	https://orca.cardiff.ac.uk/id/eprint/161972

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