Carbon futures and macroeconomic risk factors: A view from the EU ETS
AbstractThis article examines the empirical relationship between the returns on carbon futures - a new class of commodity assets traded since 2005 on the European Union Emissions Trading Scheme (EU ETS) - and changes in macroeconomic conditions. By using variables which possess forecast power for equity and commodity returns, we document that carbon futures returns may be weakly forecast on the basis of two variables from the stock and bond markets, i.e. equity dividend yields and the "junk bond" premium. Our results also suggest that the forecast abilities of two variables related to interest rates variation and economic trends on global commodity markets, respectively the U.S. Treasury bill yields and the excess return on the Reuters/CRB Index, are not robust on the carbon market. This latter result reinforces the belief that the EU ETS is currently operating as a very specific commodity market, with distinct fundamentals linked to allowance supply and power demand. The sensitivity of carbon futures to macroeconomic influences is carefully identified following a sub-sample decomposition before and after August 2007, which attempts to take into account the potential impact of the "credit crunch" crisis. Collectively, these results challenge the market observers' viewpoint that carbon futures prices are immediately correlated with changes in the macroeconomic environment, and rather suggest that the carbon market is only remotely connected to macroeconomic variables. The economic logic behind these results may be related to the fuel-switching behavior of power producers in influencing primarily carbon futures price changes.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Energy Economics.
Volume (Year): 31 (2009)
Issue (Month): 4 (July)
Contact details of provider:
Web page: http://www.elsevier.com/locate/eneco
Carbon futures Macroeconomic risk factors EU ETS;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Duong, Huu Nhan & Kalev, Petko S., 2008. "The Samuelson hypothesis in futures markets: An analysis using intraday data," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 489-500, April.
- Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
- Zakoian, Jean-Michel, 1994. "Threshold heteroskedastic models," Journal of Economic Dynamics and Control, Elsevier, vol. 18(5), pages 931-955, September.
- Bessec, Marie & Fouquau, Julien, 2008. "The non-linear link between electricity consumption and temperature in Europe: A threshold panel approach," Energy Economics, Elsevier, vol. 30(5), pages 2705-2721, September.
- Bessembinder, Hendrik & Chan, Kalok, 1992. "Time-varying risk premia and forecastable returns in futures markets," Journal of Financial Economics, Elsevier, vol. 32(2), pages 169-193, October.
- Sadorsky, Perry, 2002. "Time-varying risk premiums in petroleum futures prices," Energy Economics, Elsevier, vol. 24(6), pages 539-556, November.
- Bessembinder, Hendrik, et al, 1995. " Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure," Journal of Finance, American Finance Association, vol. 50(1), pages 361-75, March.
- Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
- E.K. Berndt & B.H. Hall & R.E. Hall, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 103-116 National Bureau of Economic Research, Inc.
- Fouquau, Julien & Bessec, Marie, 2008. "The Non-Linear Link between Electricity Consumption and Temperature in Europe : A Threshold Panel Approach," Economics Papers from University Paris Dauphine 123456789/8180, Paris Dauphine University.
- Gourieroux, Christian & Monfort, Alain & Trognon, Alain, 1984.
"Pseudo Maximum Likelihood Methods: Theory,"
Econometric Society, vol. 52(3), pages 681-700, May.
- 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.
- Oberndorfer, Ulrich, 2009. "EU Emission Allowances and the stock market: Evidence from the electricity industry," Ecological Economics, Elsevier, vol. 68(4), pages 1116-1126, February.
- Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
- Benz, Eva & Trück, Stefan, 2009. "Modeling the price dynamics of CO2 emission allowances," Energy Economics, Elsevier, vol. 31(1), pages 4-15, January.
- Bailey, Warren & Chang, K C, 1993. " Macroeconomic Influences and the Variability of the Commodity Futures Basis," Journal of Finance, American Finance Association, vol. 48(2), pages 555-73, June.
- Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
- Sadorsky, Perry, 2006. "Modeling and forecasting petroleum futures volatility," Energy Economics, Elsevier, vol. 28(4), pages 467-488, July.
- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
- Maria Mansanet-Bataller & Angel Pardo & Enric Valor, 2007. "CO2 Prices, Energy and Weather," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 73-92.
- repec:ner:dauphi:urn:hdl:123456789/8180 is not listed on IDEAS
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.