Hedging with CO2 allowances: the ECX market
AbstractWe investigate and empirically estimate optimal hedge ratios, for the first time, in the EU ETS carbon market. Minimum variance hedge ratios are conditionally estimated with multivariate GARCH models, and unconditionally by OLS and the naïve strategy for the European Climate Exchange (ECX) market in the period 2005-2009. Also, utility gains are considered in order to take into account risk-return considerations. Empirical results indicate that dynamic hedging provides superior gains (in reducing the variance portfolio) compared to those obtained from static hedging, when adjustment costs are not taken into account. Moreover, results improve when the leptokurtic characteristics of the data are into consideration through distributions. Results are always compared in and out of sample, suggesting also that utility gains increase with investor's increased preference over risk.
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Bibliographic InfoPaper provided by Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro in its series Working Papers de Economia (Economics Working Papers) with number 55.
Length: 35 pages
Date of creation: Dec 2010
Date of revision:
CO2 Emission Allowances; Dynamic Hedging; Futures Prices; Risk Management; Spot Prices;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- G19 - Financial Economics - - General Financial Markets - - - Other
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-03 (All new papers)
- NEP-ENE-2011-01-03 (Energy Economics)
- NEP-ENV-2011-01-03 (Environmental Economics)
- NEP-EUR-2011-01-03 (Microeconomic European Issues)
- NEP-RMG-2011-01-03 (Risk Management)
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