Abstract
This paper examines the time-frequency spillovers and connectedness network between European ETS and the sustainability markets. Empirically, we rely on the Baruník and Křehlík (2018) Diebold and Yilmaz (2012) spillover index to measure the time-varying spillovers, directional spillover, net directional spillover and connectedness network in the short-term and long-term investment horizons. Our findings suggest higher overall interconnectedness between the carbon price returns and sustainability indices, with a total spillover index of 69.75%. More specifically, the magnitude of spillovers is substantially higher in the short term than in the long terms. Moreover, European, France, and Germany sustainability indices exhibit the properties of the largest transmitter of spillover of returns towards the system whereas carbon prices are the lowest contributor to transmitting the spillovers towards the system. In the connectedness network, ETS offers a good investment opportunity with Belgium and Finland sustainability indices due to the lower level of returns connectedness. Finally, ETS provides the portfolio risk reduction in the short-term and long-term investment horizons.
•The time-frequency spillovers and connectedness network between European ETS and the sustainability markets.•The time-varying spillovers, directional spillover, net directional spillover and connectedness network.•Higher overall interconnectedness between the carbon price returns and sustainability indices.•Sustainability indices exhibit the properties of the largest transmitter of spillover of returns towards the system.•Carbon prices are the lowest contributor to transmitting the spillovers towards the system.•ETS provides the portfolio risk reduction in the short-term and long-term investment horizons.