Dynamic Correlation between Carbon Market and Chinese Stock Market Based on AGDCC-GARCH

摘要

Along with the worldwide concern on climate change, the greenhouse gas emission permit has emerged as a new asset with increasing liquidity and its derivatives has been traded more and more frequently on climate exchanges. This paper selects the European Union Allowance (EUA) futures traded on European Climate Exchange (ECX) to represent the emission permit market (carbon market), Shanghai Composite Index to represent Chinese stock market, and adopts the Asymmetric Generalized Dynamic Conditional Correlation (AGDCC) - GARCH model to analyze the dynamic correlation between carbon market and Chinese stock market. The empirical result shows that, the EUA futures share the characteristics of "Heavy Tail" and "Volatility Clustering" with conventional financial assets, and are correlated very weakly with the Shanghai Composite Index. Moreover, the correlation becomes even weaker when the volatility in Shanghai Composite Index increases. The results have important significance for Chinese investors to seize the opportunity brought up by carbon market to make internationally diversified investments.