Balcilar, MehmetDemirer, RızaHammoudeh, ShawkatNguyen, Duc Khuong2016-08-052016-02Balcilar, M, Demirer, R, Hammoudeh, S & Nguyen, DK 2016, 'Risk spillovers across the energy and carbon markets and hedging strategies for carbon risk', Energy Economics, vol. 54, pp. 159-1720140-9883 (print)1873-6181 (online)10.1016/j.eneco.2015.11.003http://hdl.handle.net/2263/56208This study examines the risk spillovers between energy futures prices and Europe-based carbon futures contracts. We use a Markov regime-switching dynamic correlation, generalized autoregressive conditional heteroscedasticity (MS-DCC-GARCH) model in order to capture the time variations and structural breaks in the spillovers. We further evaluate the optimal weights, hedging effectiveness, and dynamic hedging strategies for the MS-DCC-GARCH model based on both the regime dependent and regime independent optimal hedge ratios. We finally complement our analysis by examining the in- and out-of sample hedging performances for alternative strategies. Our results mainly show significant volatility and time-varying risk transmission from energy markets to carbon market. We also find that spot and futures segments of the emission markets exhibit time-varying correlations and volatile hedging effectiveness. The subsample estimates show significant changes in the hedge effectiveness over the different phases of the European carbon market. These results have important investment and policy implications.en© 2015 Elsevier B.V. All rights reserved. Notice : this is the author’s version of a work that was accepted for publication in Energy Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Energy Economics, vol. 54, pp. 159-172, 2016. doi : 10.1016/j.eneco.2015.11.003.Multivariate regime-switchingTime-varying correlationsHedgingCO2 allowance pricesMarkov regime-switching dynamic correlation, generalized autoregressive conditional heteroscedasticity (MS-DCC-GARCH) modelPostprint Article