Carbon market has attracted the attention from all over the world. This paper applies several statistical methods to analyze the price volatility properties of the Europe Union Emission Trade Scheme, and develops an integrated VEC-MVGARCH model to investigate the dynamic nonlinear relationships of EUA and CER markets under the EU-ETS. Empirical results indicate that both returns and volatilities are nonlinearly, asymmetrically and dynamically related. Returns of EUA and CER are cointegrated in the long run with deviations adjusted by their error correction mechanism. Significant effect of return spillover is detected and EUA plays the leading role in the short-run dynamics. Moreover, volatilities of EUA and CER are asymmetrically linked. Volatility spillover is detected and EUA reacts to new information first and transmits it to CER, leading the dynamics of market volatility. The findings of EUA and CER relations may help traders optimize carbon portfolio and manage climate risks.
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