Assessing Frequency and Asymmetric Risk Spillovers in the Carbon-Commodity-Finance Nexus

Abstract

This study provides a comprehensive analysis of systemic spillovers within China's "Carbon-Commodity-Finance" nexus, employing both time-domain and frequency-domain perspectives. Utilizing the Time-Varying Parameter Vector Autoregressive (TVP-VAR) model, we uncover significant asymmetries in the market's response to negative versus positive shocks and highlight the predominant influence of short-term fluctuations on the total run Total Connectedness Index (TCI). Our findings reveal a heightened sensitivity of the system's connectedness to sudden events, particularly during crises such as the COVID-19 pandemic, which induced more persistent market turbulence compared to geopolitical tensions like the US-China trade conflict and the Russo-Ukrainian conflict. The study's multi-dimensional approach, integrating asymmetric and frequency-based spillover analyses, offers novel insights into the dynamic interplay between carbon, commodity, and financial markets in China. These insights are crucial for policymakers and investors as they navigate the complex landscape of climate change policies and market forces, striving to balance economic growth with environmental sustainability. The research contributes to the literature by providing a nuanced understanding of market reactions to various shocks and the persistence of market shocks across different frequencies, which is essential for informed decision-making and risk management in the context of climate change.

Keywords: Carbon-Commodity-Finance Nexus, Asymmetric, frequency, TVP-VAR, market volatility