Risk spillover between carbon markets and stock markets from a progressive perspective: Measurements, spillover networks, and driving factors

Prior studies have established the existence of risk correlation and spillover effects between carbon markets and stock markets. However, these research findings have mostly been at the whole market-level and are limited in their applicability to sectoral-level and enterprise-level decision-making, especially for emerging economies like China. This paper adopts an innovative and progressive perspective to bridge this existing gap by leveraging the Diebold-Yilmaz spillover index method, social network analysis and exponential random graph model to comprehensively evaluate the spillover level, network structure, and driving factors between the China's carbon market and the stock markets across various sectors. It is found that: (1) the China's carbon market and stock market as a whole display significant, unbalanced, and extreme-event-sensitive spillover effects, with the carbon market primarily serving as a net receiver of information; (2) the spillover effects exhibit noteworthy heterogeneities across diverse sectoral stock markets, and we discovered that the carbon market plays the role of a “main benefit ” in the network; and (3) within the selected four representative sectors, environmental information disclosure indicator, enterprise green transformation indicator and selected financial indicators all have the potential to significantly influence the structure of inter-enterprise spillover networks to varying degrees. Overall, the findings of our study hold significant practical implications for policymakers and investors involved in the carbon market, while providing new insights into addressing real issues related to sectoral coverage in the carbon market.