Time-frequency connectedness among international energy, China's carbon market, green bonds, and capital markets: Evidence from a novel time-frequency method

Abstract

The increasing frequency of extreme risk events has drawn attention to the interconnectedness of emerging green financial markets with traditional financial and energy markets. This study employs the quantile vector autoregressive (QVAR) methodology to analyze the time-frequency connectedness among the international energy market, the Chinese carbon market, the green bond market, and the capital market, considering various market conditions and maturities from both temporal and frequency perspectives. The findings of this research are significant. Firstly, it is observed that the interconnectedness among these markets markedly intensifies during extreme market conditions in comparison to normal states. From a temporal standpoint, during periods of extreme market downturns and upturns, the international energy market and the capital market emerge as the primary sources of risk spillover, while the carbon emission trading market predominantly acts as the recipient of such spillovers. Secondly, in terms of frequency, the spillover effects among the variables during extreme conditions are primarily characterized by short-term impacts; however, caution is warranted regarding the medium to long-term spillover effects associated with green bonds. Furthermore, under extreme conditions, the efficacy of green bonds as a hedging instrument for certain equity assets may diminish. Lastly, since 2023, global extreme risk events, such as the Israel-Palestine conflict, have significantly influenced the distribution of risk spillovers among these markets. This study contributes to the understanding of risk transmission mechanisms between emerging green financial markets and traditional energy and financial markets, offering valuable insights for risk prediction and regulatory measures.