Modeling the Price Dynamics of Co2 Emission Allowances

33 Pages Posted: 19 May 2006 Last revised: 17 Feb 2014

See all articles by Eva A. Benz

Eva A. Benz

University of Bonn - Bonn Graduate School of Economics

Stefan Trück

Macquarie University Sydney - Department of Applied Finance and Actuarial Studies; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR); Macquarie University, Macquarie Business School

Date Written: February 20, 2008

Abstract

In this paper we analyze the short-term spot price behavior of carbon dioxide (CO2) emission allowances of the new EU-wide CO2 emissions trading system (EU-ETS). After reviewing the stylized facts of this new class of assets we investigate several approaches for modeling the returns of emission allowances. Due to the different phases of price and volatility behavior in the returns, we suggest the use of Markov switching and AR-GARCH models for stochastic modeling. We examine the approaches by conducting an in-sample and out-of-sample forecasting analysis and by comparing the results to alternative approaches. Our findings strongly support the adequacy of the models capturing characteristics like skewness, excess kurtosis and in particular different phases of volatility behavior in the returns.

Keywords: CO2 Emission Allowances, Emissions Trading, Spot Price Modeling, Regime-Switching Models

JEL Classification: C22, Q43, C51

Suggested Citation

Benz, Eva A. and Trueck, Stefan, Modeling the Price Dynamics of Co2 Emission Allowances (February 20, 2008). Available at SSRN: https://ssrn.com/abstract=903240 or http://dx.doi.org/10.2139/ssrn.903240

Eva A. Benz

University of Bonn - Bonn Graduate School of Economics ( email )

Adenauerallee 24-26
Bonn, D-53113
Germany

Stefan Trueck (Contact Author)

Macquarie University Sydney - Department of Applied Finance and Actuarial Studies ( email )

North Ryde
Sydney, New South Wales 2109
Australia
61298508483 (Phone)
61298508483 (Fax)

Financial Research Network (FIRN)

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

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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