Modeling the price dynamics of CO2 emission allowances

Eva Benz, Stefan Trück*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

318 Citations (Scopus)

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 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. Crown

Original languageEnglish
Pages (from-to)4-15
Number of pages12
JournalEnergy Economics
Volume31
Issue number1
DOIs
Publication statusPublished - Jan 2009

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