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Modeling volatility and dependence of European carbon and energy prices

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  • Berrisch, Jonathan
  • Pappert, Sven
  • Ziel, Florian
  • Arsova, Antonia

Abstract

We study the prices of European Emission Allowances (EUA), whereby we analyze their uncertainty and dependencies on related energy prices (natural gas, coal, and oil). We propose a probabilistic multivariate conditional time series model with a VECM-Copula-GARCH structure which exploits key characteristics of the data. Data are normalized with respect to inflation and carbon emissions to allow for proper cross-series evaluation. The forecasting performance is evaluated in an extensive rolling-window forecasting study, covering eight years out-of-sample. We discuss our findings for both levels- and log-transformed data, focusing on time-varying correlations, and in view of the Russian invasion of Ukraine.

Suggested Citation

  • Berrisch, Jonathan & Pappert, Sven & Ziel, Florian & Arsova, Antonia, 2023. "Modeling volatility and dependence of European carbon and energy prices," Finance Research Letters, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322006791
    DOI: 10.1016/j.frl.2022.103503
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    References listed on IDEAS

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    Cited by:

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    2. Simon Hirsch & Florian Ziel, 2023. "Multivariate Simulation-based Forecasting for Intraday Power Markets: Modelling Cross-Product Price Effects," Papers 2306.13419, arXiv.org.

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    More about this item

    Keywords

    Carbon prices; Conditional volatility; Copula; Emission allowances; Energy markets; Forecasting; Multivariate modeling; Time series;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q59 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Other
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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