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Measuring the integrated risk of China’s carbon financial market based on the copula model

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Abstract

Measuring the risks of the carbon financial market is of great significance for investment decision-making, risk supervision, and the healthy development of the carbon trading market. Different from previous studies based on traditional VaR (value at risk), this study measures the integrated risk of China’s carbon market based on the Copula-EVT (Extreme Value Theory) -VaR model which can explore the unique strength of the copula and EVT-VaR models, of which the copula model is applied to capture the dependence between the different risk factors of carbon price volatility and macroeconomic fluctuation, while the EVT-VaR is used to explore the risk value. The empirical results show that the traditional VaR that only considers a single risk factor from carbon price volatility is likely to overestimate the risk. In addition, compared with other methods that do not consider the interdependence between risk factors, using the copula function to measure the carbon market integration risk is more effective, and backtesting also confirms this conclusion. This paper provides a specific reference for carbon emission companies to participate in the carbon market. It provides a theoretical basis for the supervision of the risk management of the carbon market.

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Authors and Affiliations

  1. Department of Economics and Management, North China Electric Power University, No. 619, Yonghua North Street, Baoding, Hebei, China

    Xiping Wang & Lina Yan

Authors
  1. Xiping Wang
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  2. Lina Yan
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Contributions

All authors contributed to the study conception and design. Material preparation, data collection, and analysis were performed by XW and LY. The first draft of the manuscript was written by LY, and all authors commented on previous versions of the manuscript. All authors read and approved the final manuscript.

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Correspondence to Lina Yan.

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The authors declare no competing interests.

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Responsible Editor: Arshian Sharif

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Wang, X., Yan, L. Measuring the integrated risk of China’s carbon financial market based on the copula model. Environ Sci Pollut Res 29, 54108–54121 (2022). https://doi.org/10.1007/s11356-022-19679-w

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  • DOI: https://doi.org/10.1007/s11356-022-19679-w

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