Financial Turmoil in Carbon Markets

Posted: 21 May 2019

See all articles by Takashi Kanamura

Takashi Kanamura

Kyoto University - Graduate School of Advanced Integrated Studies in Human Survivability (GSAIS)

Date Written: August 3, 2010


This paper assesses the impact of financial turmoil on carbon markets. For the assessment, we offer the price correlation model between financial and carbon assets using the price-volume relationship. In particular, the carbon trading behavior aligned with security trading is incorporated into the model. The model indicates that the correlation increases when stock prices plunge, referred to as contagion. Moreover, we show that the sudden redundancy of emission reduction, e.g., overallocation of EUAs in the EU-ETS, reduces the correlation between carbon and security prices by employing a jump diffusion model. Empirical studies using EUA futures prices, FTSE 100, and DAX show that the correlations between EUA and FTSE 100 or DAX calculated from the Engle’s DCC model tend to decrease in FTSE 100 or DAX, respectively. It results in the existence of contagion driven by financial markets. We also show that inverse leverage effects often observed in energy markets do not exist in all of EUA, FTSE 100, and DAX markets according to the price-volatility relationship. In addition, we show that the positive relationship between EUA futures prices and FTSE 100 or DAX indices for the phase II of the EU-ETS is more enhanced than the phase I of the EU-ETS. We finally investigate the differences of the correlations between carbon prices and stock indices regarding the type of carbon assets, i.e., EUA and CER. It is found that EUA correlates with FTSE 100 and DAX more strongly than CER on average.

Keywords: EUA, FTSE 100, DAX, Futures, Dynamic Conditional Correlation, Contagion

JEL Classification: Q56

Suggested Citation

Kanamura, Takashi, Financial Turmoil in Carbon Markets (August 3, 2010)., Available at SSRN: or

Takashi Kanamura (Contact Author)

Kyoto University - Graduate School of Advanced Integrated Studies in Human Survivability (GSAIS) ( email )

1, Yoshida-Nakaadachi-cho, Sakyo-ku,
Kyoto, 606-8306
81-75-762-2004 (Phone)
81-75-762-2004 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics