The volatility connectedness of the EU carbon market with commodity and financial markets in time- and frequency-domain: The role of the US economic policy uncertainty

This study examines the transmission of volatility risks between the EU carbon market and various commodity and financial markets across different frequency bands, while accounting for the role of the U.S. economic policy uncertainty (EPU). Our findings show that the connectedness between the carbon market and others is non-trivial and heterogeneous. In particular, the volatility connectedness increases as frequency cycle increases, indicating that risks transmission is most intense when assets are held for a longer-time. On average, the carbon, gold and the U.S. currency markets are net receivers of shocks, and the carbon market is further revealed to be a net receiver of shocks from all other markets except the copper and the U.S. currency markets at higher frequency cycle. Finally, we establish that the U.S. EPU is a notable driver of the connectedness between the carbon market and each of the remaining markets.