Nonlinear dependence and connectedness between clean/renewable energy sector equity and European emission allowance prices

Highlights: • Connectedness spillovers and nonlinear dependence between EUA price and clean/renewable energy indices are explored. • Time-frequency spillover index and time-varying parameter copula approaches are employed. • Connectedness spillovers between EUA price and renewable energy indices are stronger in the short term. • In the short term, the S&P Global Clean Energy and Global Wind Energy indices most strongly spillover on the EUA price. • EUA price is symmetrically related, i.e., in the centre and in the tails, with the renewable energy indices. This study examines frequency volatility spillovers, connectedness and the nonlinear dependence between the European emission allowance (EUA) prices and renewable energy indices. For this purpose, we use a time-scale spillover index and different copula functions. The results show a dominance of short-term volatility spillovers between carbon prices and renewable energy indices over their long-term counterpart. More importantly, the spillover strength is high between carbon prices and both S&P clean energy and wind energy indices in the short term. Meanwhile, a strong spillover is most pronounced between the clean energy indices and the carbon price in the long term. Furthermore, the carbon price is predominantly the receiver of spillovers from the clean energy indices irrespective of the time horizon. Using dynamic copula, we show positive and dynamic dependence between the carbon prices and both clean and solar indices, whereas an asymmetric tail dependence between carbon prices and renewables, technology and wind indices.