Energy commodity and stock market interconnectedness: Evidence from carbon emission trading system

This research paper investigates the various dependence structures across oil prices, emission prices and stock markets for Middle East and Gulf Cooperation Council (GCC) countries. This study enables us to form a judgement on how the phased implementation of Kyoto protocol and COP26 on climate change is likely to be translated into changes in policy multipliers as the changes feed into the real economy through stock market movements. We employ the spillover index developed by Diebold and Yilmaz (2012) and Barunik and Kr ˇehlik (2018) to identify the most strongly related stock index to oil price return. Also, we investigate how emission price (which represents the cost of pollution) changes feed into oil price and how that impact on stock markets and what is the short- and long run spillovers between them. It is important to acknowledge some of the limitations of this study. One potential limitation is the focus on a specific geographic region, the Middle East and GCC countries. This may limit the generalizability of the findings to other regions. Additionally, the study focuses on the dependence structure among oil prices, emission prices, and stock markets, and does not consider other factors that may influence the relationship between these variables. Nonetheless, our study provides useful empirical evidence for assessing the impact of energy transition on both oil prices and stock price movements and can inform the development of diversified revenue streams for the region. In terms of future research, it would be worthwhile to extend the analysis to include additional variables, such as renewable energy prices, to gain a more comprehensive understanding of the dynamics at play in the energy markets of the Middle East and GCCs.