Options Introduction and Volatility in the EU ETS

27 Pages Posted: 20 Jul 2009 Last revised: 18 Jan 2017

See all articles by Julien Chevallier

Julien Chevallier

University of Paris 8 Vincennes-Saint Denis

Yannick Le Pen

Université Paris Dauphine

Benoît Sévi

University of Nantes

Date Written: July 1, 2009

Abstract

To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identification of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had no effect on the volatility in the EU ETS. These finding are robust to other likely influences linked to energy and commodity markets.

Keywords: EU ETS, Option prices, Volatility, GARCH, Rolling Estimation, Endogenous Structural Break Detection

JEL Classification: Q48, Q57, Q58

Suggested Citation

Chevallier, Julien and Le Pen, Yannick and Sévi, Benoît, Options Introduction and Volatility in the EU ETS (July 1, 2009). Available at SSRN: https://ssrn.com/abstract=1436500 or http://dx.doi.org/10.2139/ssrn.1436500

Julien Chevallier (Contact Author)

University of Paris 8 Vincennes-Saint Denis ( email )

Paris
France

Yannick Le Pen

Université Paris Dauphine ( email )

Place du Maréchal de Lattre de Tassigny
75775
France

Benoît Sévi

University of Nantes ( email )

1, quai de Tourville BP
Nantes Cedex 1
Nantes, 44313
France

HOME PAGE: http://www.iemniae.univ-nantes.fr/sevi-b/0/fiche___annuaireksup/

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