Detecting instability in the volatility of carbon prices
AbstractThis article investigates the presence of outliers in the volatility of carbon prices. We compute three different measures of volatility for European Union Allowances, based on daily data (EGARCH model), option prices (implied volatility), and intraday data (realized volatility). Based on the methodology developed by Zeileis et al. (2003) and Zeileis (2006), we detect instability in the volatility of carbon prices based on two kinds of tests: retrospective tests (OLS-/Recursive-based CUSUM processes, F-statistics, and residual sum of squares), and forward-looking tests (by monitoring structural changes recursively or with moving estimates). We show evidence of strong shifts mainly for the EGARCH and IV models during the time period. Overall, we suggest that yearly compliance events, and growing uncertainties in post-Kyoto international agreements, may explain the instability in the volatility of carbon prices.
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Bibliographic InfoArticle provided by Elsevier in its journal Energy Economics.
Volume (Year): 33 (2011)
Issue (Month): 1 (January)
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Web page: http://www.elsevier.com/locate/eneco
Instability test EGARCH Implied volatility Realized volatility EU ETS Carbon price;
Other versions of this item:
- Chevallier, Julien, 2011. "Detecting instability in the volatility of carbon prices," Economics Papers from University Paris Dauphine 123456789/5110, Paris Dauphine University.
- Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
- G1 - Financial Economics - - General Financial Markets
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
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