The Information Content of Carbon Options

42 Pages Posted: 2 May 2013

See all articles by Svetlana Viteva

Svetlana Viteva

University of Stirling

Yulia V. Veld-Merkoulova

Monash University - Department of Finance; Financial Research Network (FIRN)

Kevin Campbell

University of Stirling - Stirling Management School

Date Written: April 26, 2013

Abstract

This study analyses the forecasting accuracy of the implied volatility of options on futures contracts for the delivery of CO2 emissions allowances (carbon options) traded on the European Climate Exchange. We demonstrate that option implied volatility is highly informative about the variance of returns realized over the remaining life of the options. It is also directionally accurate in predicting future volatility changes. However, we also find that implied volatility of carbon options is biased and informationally inefficient, especially for periods of time which do not coincide with the remaining life of the option. This suggests that the market has yet to fully mature.

Keywords: carbon options, implied volatility, volatility forecasting, EU Emissions Trading Scheme

JEL Classification: G13, Q5

Suggested Citation

Viteva, Svetlana and Veld-Merkoulova, Yulia V. and Campbell, Kevin, The Information Content of Carbon Options (April 26, 2013). Available at SSRN: https://ssrn.com/abstract=2258988 or http://dx.doi.org/10.2139/ssrn.2258988

Svetlana Viteva

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

Yulia V. Veld-Merkoulova (Contact Author)

Monash University - Department of Finance ( email )

Building H
Caulfield, Victoria 3145
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Kevin Campbell

University of Stirling - Stirling Management School ( email )

Stirling Management School
Division of Accounting and Finance
Stirling, Scotland FK9 4LA
United Kingdom
(44) 1786 467280 (Phone)
(44) 1786 467308 (Fax)

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