Research On Spillover Effect Within European Union Emission Trading Scheme

European Union Emission Trading Scheme is the world’s largest carbon trading platform,therefore the volatility of its sub-market will spill over to the international carbon market quickly.It is helpful to understand the fluctuation of the global carbon market by examining the information flow within the EU ETS.This paper uses the EUA data as the research object and considers the importance of carbon option,extending spillover effect on carbon emission markets to spot market,futures market and options market.Then the paper tests the information flow relationship between the three markets from the perspective of mean spillover effect and volatility spillover effect.In terms of mean spillover effect,this paper uses Vector Error Correction model and Granger causality test,the empirical results are as follows:within the EU ETS,spot market,futures market and options market have information spillover effects in different degree.Options market has higher operating efficiency and is the main party of information spillover.Options market firstly absorb and digest most of the information,and then passed to the spot and futures markets to guide the price of the two markets.The futures and spot markets also play a role of information spillover,especially the information spillover from the futures market to the spot market is strong indicating the price discovery function of futures market.In terms of volatility spillover effect,this paper uses a t distribution hypothesis considering the return of carbon prices has an obvious peak and fat tails to improve the DGC-MSV model which is able to describe the stochastic volatility of carbon prices better using,therefore investigating the intensity and dynamic relationship of volatility spillover.The empirical results are as follows.The options market is the center of the volatility spillover within the EU ETS which plays a leading role in the process of information flow and risk transfer.The development of the futures market and the quality of the information are higher,the price can fully reflect the factors affecting the supply and demand of carbon assets and the expectations of the traders.With the development of the spot market,the flow of information is speeding up,the stock market is moving towards the center of the volatility spillover.There is a high and dynamic degree of positive correlation in the markets of EUAspot,EUA futures,EUA options.Particularly,the relationship between spot and futures markets、spot and options markets fluctuated wildly but didn’t last long,it indicates that the markets can quickly digest the information which causes price fluctuations.However the correlation between futures and options markets is stable but last long,indicating that the digestion process is slow and the self-adjustment mechanism is weak.