Liquidity spillover from carbon emission trading markets to stock markets in China
-
DOIhttp://dx.doi.org/10.21511/imfi.20(4).2023.19
-
Article InfoVolume 20 2023, Issue #4, pp. 227-241
- Cited by
- 353 Views
-
37 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This study delves into China’s carbon emissions trading markets, investigating the interplay between carbon price liquidity and stock liquidity. Focusing on 338 companies listed in the national and eight pilot markets of the carbon emissions trading system from August 2013 to October 2023, the empirical finding reveals a positive impact of carbon price liquidity on stock liquidity. Notably, this positive association manifests more robustly in industries characterized by low carbon intensity compared to those with high carbon intensity, is more prominent during the COVID-19 period than in preceding times, and is particularly accentuated in the Hubei Province and Chongqing, as opposed to the remaining seven regions. Intriguingly, both carbon price liquidity and stock liquidity display positive autocorrelations in vector autoregression analysis. The endogeneity concern is alleviated by the two-stage least squares regressions, using lagged carbon price liquidity as instrumental variables. This study contributes to an enhanced comprehension of the dynamic interaction between carbon price liquidity and stock liquidity contextualized within China’s evolving carbon market landscape. The insights garnered herein hold substantial value for investors and government stakeholders seeking to navigate this evolving financial terrain.
Acknowledgment
This research was supported by the Summer Student Partnering with Faculty Research Program of Wenzhou-Kean University (WKUSSPF202304), the Wenzhou Association for Science and Technology – Service and Technology Innovation Program (jczc0254), and the Department of Education of Zhejiang Province – General Program (Y202353438).
- Keywords
-
JEL Classification (Paper profile tab)G12, G14, G15, Q56
-
References60
-
Tables8
-
Figures1
-
- Figure 1. Vector autoregression impulse function
-
- Table 1. Descriptive statistics
- Table 2. Pairwise correlations between variables
- Table 3. Baseline regression
- Table 4. Low- and high-carbon-intensity industries
- Table 5. Different ETS markets
- Table 6. Subperiod analysis
- Table 7. Vector autoregression analysis
- Table 8. Two-stage least squares regression results
-
- Amihud, Y. (2002). Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets, 5(1), 31-56.
- Asem, E., Chung, J., Cui, X., & Tian, G. Y. (2016). Liquidity, investor sentiment and price discount of SEOs in Australia. International Journal of Managerial Finance, 12(1), 25-51.
- Balcılar, M., Demirer, R., Hammoudeh, S., & Nguyen, D. K. (2016). Risk spillovers across the energy and carbon markets and hedging strategies for carbon risk. Energy Economics, 54, 159-172.
- Boyd, J. H., Levine, R., & Smith, B. D. (1996). Inflation and Financial Market Performance (Working Paper, 96-17).
- Chan, J. S., Jain, R., & Xia, Y. (2008). Market segmentation, liquidity spillover, and closed-end country fund discounts. Journal of Financial Markets, 11(4), 377-399.
- Chang, K., Chen, R., & Chevallier, J. (2018a). Market fragmentation, liquidity measures and improvement perspectives from China’s emissions trading scheme pilots. Energy Economics, 75, 249-260.
- Chang, K., Lu, S., & Song, X. (2018b). The impacts of liquidity dynamics on emissions allowances price: Different evidence from China’s emissions trading pilots. Journal of Cleaner Production, 183, 786-796.
- Chang, Y. T., Gau, Y. F., & Hsu, C. C. (2022). Liquidity spillover in foreign exchange markets. Finance Research Letters, 44, 102105.
- Chen, Z., Xiao, Y., & Jiang, K. (2023). Corporate green innovation and stock liquidity in China. Accounting & Finance, 63, 1381-1415.
- Cheng, J., Yi, J., Dai, S., & Xiong, Y. (2019). Can low-carbon city construction facilitate green growth? Evidence from China’s pilot low-carbon city initiative. Journal of Cleaner Production, 231, 1158-1170.
- Cheng, S. R. (2007). A study on the factors affecting stock liquidity. International Journal of Services and Standards, 3(4), 453-475.
- Chung, K., Elder, J., & Kim, J. (2010). Corporate governance and liquidity. Journal of Financial and Quantitative Analysis, 45(2), 265-291.
- Dong, F., Li, X., Long, R., & Liu, X. (2013). Regional carbon emission performance in China according to a stochastic frontier model. Renewable and Sustainable Energy Reviews, 28, 525-530.
- Duan, H., Mo, J., Fan, Y., & Wang, S. (2018). Achieving China’s energy and climate policy targets in 2030 under multiple uncertainties. Energy Economics, 70, 45-60.
- Duan, H., Yuan, D., Cai, Z., & Wang, S. (2022). Valuing the impact of climate change on China’s economic growth. Economic Analysis and Policy, 74, 155-174.
- Heckman, J. (1997). Instrumental variables: A study of implicit behavioral assumptions used in making program evaluations. Journal of Human Resources, 32(3), 441-462.
- Huang, G. C., Liano, K., & Pan, M. S. (2015). The effects of stock splits on stock liquidity. Journal of Economics and Finance, 39, 119-135.
- IEA (2022). World energy outlook 2022.
- Jiang, J., Xie, D., Ye, B., Shen, B., & Chen, Z. (2016). Research on China’s cap-and-trade carbon emission trading scheme: Overview and outlook. Applied Energy, 178, 902-917.
- Jiang, L. (2014). Stock liquidity and the Taylor rule. Journal of Empirical Finance, 28, 202-214.
- Kalaitzoglou, I., & Ibrahim, B. M. (2013). Does order flow in the European Carbon Futures Market reveal information? Journal of Financial Markets, 16(3), 604-635.
- Karnaukh, N., Ranaldo, A., & Söderlind, P. (2015). Understanding FX liquidity. Review of Financial Studies, 28(11), 3073-3108.
- Khan, K. N. (2004). Inflation and stock market performance: A case study for Pakistan. Savings and Development, 28(1), 87-101.
- Li, Y., Han, M., Faff, R., & Zhang, H. (2022). Foreign ownership and stock liquidity uncertainty. Journal of International Financial Markets, Institutions and Money, 81, 101673.
- Lim, S. Y., & Choi, S. Y. (2022). Impact of liquidity spillovers among industrial sectors on stock markets during crisis periods: Evidence from the S&P 500 index. PLoS One, 17(11), e0277261.
- Liobikienė, G., & Butkus, M. (2017). The European Union’s possibilities to achieve targets of Europe 2020 and Paris agreement climate policy. Renewable Energy, 106, 298-309.
- Liu, X., Zhou, X., Zhu, B., He, K., & Wang, P. (2019). Measuring the maturity of carbon market in China: An entropy-based TOPSIS approach. Journal of Cleaner Production, 229, 94-103.
- Naik, P., & Reddy, Y. V. (2021). Determinants of stock market liquidity – a macroeconomic perspective. Macroeconomics and Finance in Emerging Market Economies, published online.
- Ng, L., Wu, F., Yu, J., & Zhang, B. (2016). Foreign investor heterogeneity and stock liquidity around the world. Review of Finance, 20(5), 1867-1910.
- Oestreich, A. M., & Tsiakas, I. (2015). Carbon emissions and stock returns: Evidence from the EU Emissions Trading Scheme. Journal of Banking & Finance, 58, 294-308.
- Prommin, P., Jumreornvong, S., & Jiraporn, P. (2014). The effect of corporate governance on stock liquidity: The case of Thailand. International Review of Economics & Finance, 32, 132-142.
- Ren, X., Dou, Y., Dong, K., & Yan, C. (2023). Spillover effects among crude oil, carbon, and stock markets: Evidence from nonparametric causality-in-quantiles tests. Applied Economics, 55(38), 4486-4509.
- Righi, M. B., & Vieira, K. M. (2014). Liquidity spillover in international stock markets through distinct time scales. PloS one, 9(1), e86134.
- Song, Y., Liu, T., Li, Y., & Liang, D. (2017). Region division of China’s carbon market based on the provincial/municipal carbon intensity. Journal of Cleaner Production, 164, 1312-1323.
- Sun, L., Xiang, M., & Shen, Q. (2020). A comparative study on the volatility of EU and China’s carbon emission permits trading markets. Physica A: Statistical Mechanics and its Applications, 560, 125037.
- Sun, X., Fang, W., Gao, X., An, H., Liu, S., & Wu, T. (2022). Complex causalities between the carbon market and the stock markets for energy intensive industries in China. International Review of Economics & Finance, 78, 404-417.
- Tian, Y., Akimov, A., Roca, E., & Wong, V. (2016). Does the carbon market help or hurt the stock price of electricity companies? Further evidence from the European context. Journal of Cleaner Production, 112, 1619-1626.
- Wang, K., Wei, Y. M., & Huang, Z. (2016). Potential gains from carbon emissions trading in China: A DEA based estimation on abatement cost savings. Omega, 63, 48-59.
- Wang, P., Dai, H. C., Ren, S. Y., Zhao, D. Q., & Masui, T. (2015). Achieving Copenhagen target through carbon emission trading: Economic impacts assessment in Guangdong Province of China. Energy, 79, 212-227.
- Wen, D., Wang, G. J., Ma, C., & Wang, Y. (2019). Risk spillovers between oil and stock markets: A VAR for VaR analysis. Energy Economics, 80, 524-535.
- Wen, F., Wu, N., & Gong, X. (2020). China’s carbon emissions trading and stock returns. Energy Economics, 86, 104627.
- Wen, X., Wei, Y., & Huang, D. (2012). Measuring contagion between energy market and stock market during financial crisis: A copula approach. Energy Economics, 34(5), 1435-1446.
- World Bank. (2022). China’s transition to a low-carbon economy and climate resilience needs shifts in resources and technologies.
- Wu, R., & Qin, Z. (2021). Assessing market efficiency and liquidity: Evidence from China’s emissions trading scheme pilots. Science of The Total Environment, 769, 144707.
- Xie, Z., Yang, M., & Xu, F. (2023). Carbon emission trading system and stock price crash risk of heavily polluting listed companies in China: based on analyst coverage mechanism. Financial Innovation, 9(1), 71.
- Yang, F., Shi, B., Xu, M., & Feng, C. (2019). Can reducing carbon emissions improve economic performance – evidence from China. Economics, 13(1), 20190047.
- Yao, Y., Tian, L., & Cao, G. (2022). The information spillover among the carbon market, energy market, and stock market: A case study of China’s pilot carbon markets. Sustainability, 14(8), 4479.
- Zhang, J., & Han, W. (2022). Carbon emission trading and equity markets in China: How liquidity is impacting carbon returns? Economic research-Ekonomska istraživanja, 35(1), 6466-6478.
- Zhang, L., Zeng, Y., & Li, D. (2019). China’s emissions trading scheme: First evidence on pilot stage. Polish Journal of Environmental Studies, 28(2), 543-551.
- Zhang, Q., & Wong, J. B. (2023). The influence of oil price uncertainty on stock liquidity. Journal of Futures Markets, 43(2), 141-167.
- Zhang, Q., & Zhang, J. (2023). Carbon pricing and stock performance: Evidence from China’s emissions trading scheme pilot regions. Review of Pacific Basin Financial Markets and Policies, forthcoming.
- Zhang, S., Jiang, K., Wang, L., Bongers, G., Hu, G., & Li, J. (2020). Do the performance and efficiency of China’s carbon emission trading market change over time?. Environmental Science and Pollution Research, 27, 33140-33160.
- Zhang, Y. J., & Hao, J. F. (2015). The allocation of carbon emission intensity reduction target by 2020 among provinces in China. Natural Hazards, 79, 921-937.
- Zhang, Y. J., & Wang, W. (2021). How does China’s carbon emissions trading (CET) policy affect the investment of CET-covered enterprises? Energy Economics, 98, 105224.
- Zhang, Y., & Ding, S. (2021). Liquidity effects on price and return co-movements in commodity futures markets. International Review of Financial Analysis, 76, 101796.
- Zhao, X. G., Wu, L., & Li, A. (2017). Research on the efficiency of carbon trading market in China. Renewable and Sustainable Energy Reviews, 79, 1-8.
- Zheng, X., & Su, D. (2017). Impacts of oil price shocks on Chinese stock market liquidity. International Review of Economics & Finance, 50, 136-174.
- Zhou, J., Huo, X., Jin, B., & Yu, X. (2019). The efficiency of carbon trading market in China: Evidence from variance ratio tests. Environmental Science and Pollution Research, 26, 14362-14372.
- Zhou, S., & Ye, Q. (2023). Margin trading and spillover effects: Evidence from the Chinese stock markets. Emerging Markets Review, 54, 101005.
- Zhu, B., Zhou, X., Liu, X., Wang, H., He, K., & Wang, P. (2020). Exploring the risk spillover effects among China’s pilot carbon markets: A regular vine copula-CoES approach. Journal of Cleaner Production, 242, 118455.