The spillover effect between carbon market and stock markets: evidence from China

It is essential to study the spillover effect between the carbon market and stock markets to promote the efficient operation of the carbon market. This paper investigated the spillover effect between the carbon market and stock markets in China using the DY (Diebold Yilmaz) index based on modified error variance decomposition. Also, the rolling window technique was adopted to detect the time-varying spillover effect over time. The study yields several interesting results: (1) The "Carbon-Stock" system has a strong association of information conduction, with 63.86% for return spillover and 60.26% for volatility spillover. (2) The carbon market is a net receiver of information in the "Carbon-Stock" system in terms of static spillover, but the sources of information from return and volatility are different. (3) Dynamic spillover analysis shows that the carbon market's return spillover index has a wider range of fluctuation than that of the volatility spillover index, and the volatility spillover lags. Furthermore, policy changes and macroeconomic shocks can impact the time-varying spillover. This study contributes to provide new theoretical and managerial insights into comprehending the information transmission mechanisms within the intricate carbon market system, aiding us in identifying the primary sources of risk and the pathways through which risks propagate in the carbon market. Most importantly, this study can help investors and managers in the carbon and stock markets to understand the transmission processes of returns and volatility and make more informed investment decisions and policy-making.