Financial implications of the EU Emission Trading System: an analysis of wavelet coherence and volatility spillovers
Pietro De Ponti (Department of Economics, Management and Statistics, University of Milano-Bicocca); Matteo Romagnoli (Department of Economics, Management and Statistics, University of Milano-Bicocca)
C22, G11, Q58
EU Emission Trading System, volatility spillovers, wavelet coherence
We study the European Union’s Emission Trading System (EU ETS) from a financial perspective. Using ARMA-eGARCH filtered volatilities, we first discuss the evolution of the volatility of EU ETS allowances’ returns from 2008 to 2021. Second, we study the degree of co-movement and interdependence between the EU ETS returns’ volatility and those of 37 large companies in industries subject to the System; to this end, we employ Wavelet Coherence and Volatility Spillovers Analyses. Despite spotting seasons of co-movement between volatilities in the markets under consideration, the market performances of the companies in our sample are not particularly responsive to the EU ETS dynamics, except for temporary seasons of interconnection in correspondence of relevant policy changes.
Suggested citation: P. De Ponti, M. Romagnoli, ‘Financial implications of the EU Emission Trading System: an analysis of wavelet coherence and volatility spillovers’, Nota di Lavoro 022.2022, Milano, Italy: Fondazione Eni Enrico Mattei