CO2 Prices and Portfolio Management

Abstract

Since January 2005, the attention on European carbon markets has been increasing and thus the interest in studying the implications of the existence of two new assets in portfolio management. In this article we analyse both the characteristics of the EUAs Phase I and Phase II as a sole investment and the impact of including these two assets, considered separately, in a well-diversified portfolio. In order to control the problems of using historical returns, we have performed this analysis using as expected returns either historical returns or risk-adjusted returns. We find that, although the weights of EUAs are not too important when incorporating the EUAs in an optimal and well-diversified portfolio, the efficient frontier shows an increase in investor possibilities.

Keywords: CO2 Futures, Portfolio Management, Alternative Assets

JEL Classification: G11