A Study On The Spillover Effect Of China’s Carbon Market And Stock Market In The Time-frequency Domain Perspective

The construction of an ecological civilisation is a key element of the 14 th Five-Year Plan,and the construction of a multi-level carbon market is an important driver of this construction.Although China’s unified carbon market has been launched,the national carbon emission system is not yet complete,and there is still a long way to go to maintain the stable development of the carbon market in the future.Therefore,it is of great significance to study the spillover effects of the carbon market and the stock market,and to reveal the inner operating mechanism and laws of the "carbon-stock" system,in order to effectively prevent carbon financial risks.Most scholars at home and abroad have focused on the internal spillover effect of the carbon market or the external spillover effect on the energy market,while ignoring whether the carbon market has other potential external spillover effects.Moreover,the existing studies only analyse the risk spillover effects between multiple markets in the time domain,which is not comprehensive and complete.Therefore,this paper takes a time-frequency perspective and focuses on the carbon market and different sectors of the electricity,materials,real estate,industrial,financial,traditional energy and new energy stock markets at both the return spillover and volatility spillover levels.The Diebold & Yilmaz spillover index and a frequency-expanded version of the Baruník & K?ehlík spillover index are used to describe the information transmission process between the carbon market and the stock market,to more accurately analyse the causes of price linkages and risk contagion formation in the two different markets,and to more effectively capture the frequency characteristics behind price linkages and risk contagion.In this paper,we select data from the Beijing carbon market and seven different sectors of the stock market from 12 February 2015 to 28 May 2021,and firstly describe the return spillover and volatility spillover effects between the carbon market and the stock market from the time domain and frequency domain perspectives respectively through static spillover indices,and then study the dynamic spillover indices from the overall and sectoral perspectives respectively The results show that,firstly,China’s "carbon-equity" system is not as efficient as its predecessor.The results show that,firstly,China’s "carbon-equity" system is a tightly interconnected system with significant spillover effects.In general,the carbon market is the recipient of information in the whole system;in terms of different segments,the real estate and materials markets are more sensitive to price changes in the carbon market,while the electricity market has a stronger risk spillover capacity to the carbon market;the industrial market dominates when price linkages occur in the whole system,while the electricity market dominates when risk contagion occurs in the whole system.Second,spillovers between the carbon and equity markets are superimposed on different frequency components.Yield spillovers occur at high frequencies(within 2 weeks),where shocks to yields propagate rapidly across the system in the short term,while volatility spillovers are concentrated at low frequencies(over 1 month),where volatility shocks are long-term and persistent.Third,from an overall perspective,the spillover effect between China’s carbon market and equity market is time-varying.During periods of economic stability or government policy support,the total spillover index shows a relatively stable or decreasing trend,and once a major risk event occurs,the total spillover index shows a sharp increase.Fourthly,from a sectoral perspective,the spillover effect between different markets in the system is also significantly time-varying,with the carbon market remaining constant as the recipient of price shocks for most of the sample period,and alternating roles in the risk transmission process of the system.The findings of this paper are of great significance to policy makers in preventing and mitigating carbon financial risks and optimising investors’ portfolios,as well as contributing to the development of carbon markets.