Carbon and safe-haven flows

Fernando Palao; Ángel Pardo; Fernando Palao; Ángel Pardo

doi:10.3934/GF.2022023

Green Finance

2022, Volume 4, Issue 4: 474-491. doi: 10.3934/GF.2022023

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Research article

Carbon and safe-haven flows

Fernando Palao ¹,
Ángel Pardo ^{2
,
,}

1.
Department of Internal Audit, CaixaBank, Paseo de la Castellana 189, 28046 Madrid, Spain
2.
Department of Financial Economics, Faculty of Economics, University of Valencia, Avenida de los Naranjos s/n, 46022 Valencia, Spain

Received: 23 September 2022 Revised: 04 November 2022 Accepted: 17 November 2022 Published: 05 December 2022
JEL Codes: G11, G15

This paper explores the role of European Union Allowances (EUAs) as a safe haven for a range of assets and analyses the effect of safe-haven flows on the European carbon futures market. In particular, we demonstrate that EUAs can be considered a refuge against fluctuations in corporate bonds, gold and volatility-related assets in periods of market turmoil. Furthermore, we have shown that extremely bearish and bullish movements in those assets for which the EUA acts as a safe haven induce excess volatility in carbon markets, higher carbon trading volume and larger than normal EUA bid-ask spreads. These findings support the idea that some traders, by considering carbon futures as a refuge asset, induce safe-haven flows into the carbon market. The presence of these flows provides additional insights into the financialisation of the European carbon futures market.
- carbon futures,
- EUAs,
- quantile regression,
- safe-haven asset,
- safe-haven flows,
- volatility
Citation: Fernando Palao, Ángel Pardo. Carbon and safe-haven flows[J]. Green Finance, 2022, 4(4): 474-491. doi: 10.3934/GF.2022023

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Abstract

This paper explores the role of European Union Allowances (EUAs) as a safe haven for a range of assets and analyses the effect of safe-haven flows on the European carbon futures market. In particular, we demonstrate that EUAs can be considered a refuge against fluctuations in corporate bonds, gold and volatility-related assets in periods of market turmoil. Furthermore, we have shown that extremely bearish and bullish movements in those assets for which the EUA acts as a safe haven induce excess volatility in carbon markets, higher carbon trading volume and larger than normal EUA bid-ask spreads. These findings support the idea that some traders, by considering carbon futures as a refuge asset, induce safe-haven flows into the carbon market. The presence of these flows provides additional insights into the financialisation of the European carbon futures market.

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