A study on the volatility spillovers, long memory effects and interactions between carbon and energy markets: The impacts of extreme weather

- FIEC-HYGARCH analyzes the interactions between carbon and energy markets.
- The empirical model can be used to capture long memory effects.
- The carbon and energy markets have own- and cross-market spillover effects.
- It extends long memory and various spillovers by incorporating extreme weather.
- The results assist investors and government agency to make decisions.

Due to the connections of energy uses, carbon emissions and climate, this study investigates the interactions, volatility spillovers, and long memory effects for carbon, oil, natural gas and coal markets by using FIEC-HYGARCH model. It also discusses the mediating effect of extreme weather. The empirical results verify that the FIEC-HYGARCH model can capture the long-term volatility behavior. The futures returns of carbon and energy have long memory and own-mean spillover effects. Moreover, the conditional variances also have volatility spillovers, long memory effects and amplitudes. Hence, there exist dynamic interrelationships among the futures returns of carbon and energy. Further, it also extends the long memory and causes various spillover effects by incorporating extreme weather into the model, indicating that extreme weather has certain impacts on carbon, oil, natural gas and coal markets.