Oil and carbon prices : asymmetries, instability and spillovers

This paper considers the relationship between oil return volatility and carbon return volatility. It is found that oil price returns are associated with decreases in carbon price returns. An increase in oil return volatility raises the volatility of carbon prices. Even though the cross leverage effect of negative oil price returns on carbon price returns is not statistically significant, the estimated variance of carbon price is greater for oil price increases than for oil price decreases of the same absolute value given any positive or negative innovation in carbon price. These results suggest that the connection between oil price return and oil price return volatility and carbon price return volatility is complex. Estimation is with a mean threshold (TVAR) model with m GARCH heteroskedastic disturbances.