Risk spillover between the carbon market and financial market in China

Abstract Since the beginning of the twenty-first century, extreme weather conditions have come to the fore, and risk contagion has begun to spread from market to market and even globally. This paper combines the ARMA-GARCH model and the Copula function to examine the dynamic interdependence between China's carbon market and financial market. Subsequently, the risk spillover effect within these markets is investigated using Monte Carlo simulation and the Copula-CoVaR model. The findings indicate that the carbon market and China's financial system as a whole have asymmetric features and positive bidirectional risk spillover effects, but the intensity of risk spillovers varies among different markets and the overall value is small. In addition, the optimal copula functions are inconsistent between different markets, suggesting that regional markets are characterized by heterogeneity. These results have important implications for both decision-making and risk management.