Carbon financial markets: A time–frequency analysis of CO2 prices

•We characterize the interrelation of CO2 prices with energy.•We conclude that CO2 leads electricity variables in the time–frequency domain.•We do not find a significant relation between CO2 and gas.•We observe a high partial coherency between CO2 and electricity, with CO2 leading.•We observe a high partial coherency between CO2 and coal, with coal leading.

We characterize the interrelation of CO2 prices with energy prices (electricity, gas and coal), and with economic activity. Previous studies have relied on time-domain techniques, such as Vector Auto-Regressions. In this study, we use multivariate wavelet analysis, which operates in the time–frequency domain. Wavelet analysis provides convenient tools to distinguish relations at particular frequencies and at particular time horizons. Our empirical approach has the potential to identify relations getting stronger and then disappearing over specific time intervals and frequencies. We are able to examine the coherency of these variables and lead–lag relations at different frequencies for the time periods in focus.