Carbon Pricing Uncertainty and the Green Finance Ecosystem: Connectedness, Contagion, and Portfolio Strategies

Résumé fourni par la source

Carbon price instability within the EU Emissions Trading System (EU ETS) is associated with financial stress that propagates across green finance markets, yet the system-level dynamics linking carbon allowance instruments, clean energy equities, green bonds, and oil volatility remain insufficiently characterized over the turbulent 2021–2026 period. This paper applies the DCC-GARCH R2 decomposed connectedness framework to five exchange-traded funds and one volatility index spanning the principal channels through which EU ETS regulatory shocks propagate to financial markets, and derives a novel Connectedness-Based Hierarchy Index (CBHI) that translates the transmitter–receiver hierarchy into a time-varying portfolio desirability index. Five key findings emerge. First, the carbon allowance futures ETF (KRBN) and the Paris-aligned equity ETF (CARB) form a near-closed systemic bloc within this asset universe: bilateral connectedness reaches 0.867, with to and from directional connectedness values both approaching 80%. Second, this co-transmitter structure is highly contingent on the joint inclusion of both instruments; excluding CARB raises KRBN’s CBHI from 0.251 to 22.204, reclassifying it as a structural diversifier and reducing the mean Total Connectedness Index (TCI) from 52.18% to 30.81%. Third, system-wide connectedness averages 52.18% but surges to nearly 73% during EU ETS regulatory crises. Fourth, connectedness-aware portfolios outperform the minimum-variance benchmark across all risk-adjusted metrics, yielding an annualized Sharpe ratio of 0.148 vs. −1.066 (T=1035 observations, daily rebalancing, zero transaction costs); this improvement is driven by reallocation toward crude oil volatility (OVX), the sole non-ETF and most peripheral instrument (to = 5.55%, CBHI=14.310), which the CBHI identifies as the system’s dominant structural diversifier and whose weight rises from 0.4% in the benchmark to 31.6%. Fifth, the CBHI uncovers a structural tension in Paris-aligned mandates: CARB records the second-lowest CBHI (0.254), indicating that climate alignment and systemic risk minimization are partially conflicting objectives.

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