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EUAs and CERs: Interactions in a Markov regime-switching environment

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  • Julien Chevallier

    ()
    (University Paris Dauphine)

Abstract

This paper analyzes jointly the time series of European Union Allowances (EUAs) and Certified Emissions Reductions (CERs) in a Markov regime-switching environment. The purpose consists in capturing the interactions between the two time series - which have been highlighted in previous literature - with respect to the underlying business cycle. Given the recent period of economic growth and financial crisis, regime switching models appear indeed interesting to shed new light on the data. The main result of the paper features a switch from a low-growth period to a high-growth period in July 2009, in a context of timid economic recovery. Besides, the Markov regime-switching model reveals that significant interactions exist between EUAs (during expansions and recessions) and CERs (mostly during expansions). Colletively, these results could be of use to regulatory authorities, academics and financial agents (investment bankers, analysts, asset managers).

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 32 (2012)
Issue (Month): 1 ()
Pages: 86-101

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Handle: RePEc:ebl:ecbull:eb-11-00422

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Keywords: EUA; CER; Markov regime-switching;

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  1. Bradley, Michael D. & Jansen, Dennis W., 2004. "Forecasting with a nonlinear dynamic model of stock returns and industrial production," International Journal of Forecasting, Elsevier, vol. 20(2), pages 321-342.
  2. Chevallier, Julien, 2011. "Anticipating correlations between EUAs and CERs : a dynamic conditional correlation GARCH model," Economics Papers from University Paris Dauphine 123456789/5441, Paris Dauphine University.
  3. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-82, April.
  4. Hervé-Mignucci, Morgan & Mansanet-Bataller, Maria & Chevallier, Julien & Alberola, Emilie, 2011. "EUA and sCER Phase II Price Drivers: Unveiling the reasons for the existence of the EUA-sCER spread," Economics Papers from University Paris Dauphine 123456789/5109, Paris Dauphine University.
  5. repec:ebl:ecbull:v:30:y:2010:i:1:p:558-576 is not listed on IDEAS
  6. Allan Timmermann & Massimo Guidolin, 2006. "An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 1-22.
  7. Chevallier, Julien, 2010. "EUAs and CERs : Vector autoregression, impulse response function and cointegration analysis," Economics Papers from University Paris Dauphine 123456789/4226, Paris Dauphine University.
  8. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  9. Chan, Kam Fong & Treepongkaruna, Sirimon & Brooks, Robert & Gray, Stephen, 2011. "Asset market linkages: Evidence from financial, commodity and real estate assets," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1415-1426, June.
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