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Modeling EU allowances and oil market interdependence. Implications for portfolio management

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  • Reboredo, Juan C.
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    Abstract

    This paper examines the dependence structure between European Union allowances (EUAs) and crude oil markets during the second commitment period of the European Union Emissions Trading Scheme and the implications for portfolio management. Using different copula models, our findings suggest positive average dependence and extreme symmetric independence that is consistent with interdependence and no contagion effects between the EUA and crude oil markets. The implication of this result for EUA-oil portfolios points to the existence of diversification benefits, hedging effectiveness, and value-at-risk reductions. The EUA market is therefore an attractive market for investors in terms of diversifying market risk and reducing downside risk in crude oil markets.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 36 (2013)
    Issue (Month): C ()
    Pages: 471-480

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    Handle: RePEc:eee:eneeco:v:36:y:2013:i:c:p:471-480

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    Web page: http://www.elsevier.com/locate/eneco

    Related research

    Keywords: CO2 emission allowances; Oil prices; Copulas; Portfolio management;

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    Cited by:
    1. Reboredo, Juan C., 2014. "Volatility spillovers between the oil market and the European Union carbon emission market," Economic Modelling, Elsevier, vol. 36(C), pages 229-234.
    2. Reboredo, Juan C., 2013. "Is gold a safe haven or a hedge for the US dollar? Implications for risk management," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2665-2676.

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