Connectedness among El Niño-Southern Oscillation, carbon emission allowance, crude oil and renewable energy stock markets: Time- and frequency-domain evidence based on TVP-VAR model

Understanding the interactions among climate change, carbon emission allowance trading, crude oil and renewable energy stock markets, especially the role of climate change in this system is of great significance for policy makers, energy producers/consumers and relevant investors. The present paper aims to quantify the time-varying connectedness effects among the four factors by using the TVP-VAR based extensions of both time- and frequency-domain connectedness index measurements proposed by Antonakakis et al. (2020) and Ellington and Barunik (2021) [8,48]. The empirical results suggest that, firstly, the average total connectedness among climate change, carbon emission allowance trading, crude oil and renewable energy stock markets is not so strong for the heterogenous fundamentals underlying them. Nevertheless, the time-varying total connectedness fluctuates fiercely through May 2005 to September 2021, varying from about 8% to 30% and rocket to very high levels during the global subprime mortgage crisis and the COVID-19 pandemic. Furthermore, the total connectedness mainly centers on the short-term frequency, i.e., 1–3 months. Secondly, climate change is generally the leading information contributor among the four factors, although not particularly strong, and its leading role also performs mainly on the short-term frequency (1–3 months). Thirdly, renewable energy stock market and crude oil market show tight interactions between them and they are the two major bridges of information exchanges across various time frequencies (horizons) in this system. Finally, we confirm the evidence that the primary net connectedness contributor and receiver switch frequently across different time frequencies, implying that it is extremely essential for policy makers, energy producers/consumers and investors to make time-horizon-specific regulatory, production/purchasing or investment decisions when facing the uncertain effects of climate change on the interactions among carbon emission allowance, crude oil and renewable energy stock markets.