IDEAS home Printed from https://ideas.repec.org/p/ave/wpaper/552010.html
   My bibliography  Save this paper

Hedging with CO2 allowances: the ECX market

Author

Listed:
  • Carlos Pinho

    (Departamento de Economia e Gestão Industrial, Universidade de Aveiro, GOVCOPP)

  • Mara Madaleno

    (Departamento de Economia e Gestão Industrial, Universidade de Aveiro, GOVCOPP)

Abstract

We 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.

Suggested Citation

  • Carlos Pinho & Mara Madaleno, 2010. "Hedging with CO2 allowances: the ECX market," Working Papers de Economia (Economics Working Papers) 55, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
    • Handle: RePEc:ave:wpaper:552010
    as

    Download full text from publisher

    File URL: https://www.ua.pt/egi/ReadObject.aspx?obj=16973
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Balcılar, Mehmet & Demirer, Rıza & Hammoudeh, Shawkat & Nguyen, Duc Khuong, 2016. "Risk spillovers across the energy and carbon markets and hedging strategies for carbon risk," Energy Economics, Elsevier, vol. 54(C), pages 159-172.
    2. repec:ipg:wpaper:2014-552 is not listed on IDEAS
    3. Tan, Xue-Ping & Wang, Xin-Yu, 2017. "Dependence changes between the carbon price and its fundamentals: A quantile regression approach," Applied Energy, Elsevier, vol. 190(C), pages 306-325.
    4. Demiralay, Sercan & Gencer, Hatice Gaye & Bayraci, Selcuk, 2022. "Carbon credit futures as an emerging asset: Hedging, diversification and downside risks," Energy Economics, Elsevier, vol. 113(C).

    More about this item

    Keywords

    CO2 Emission Allowances; Dynamic Hedging; Futures Prices; Risk Management; Spot Prices;
    All these keywords.

    JEL classification:

    • 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
    • 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 and their Management; Global Warming

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ave:wpaper:552010. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marta Ferreira Dias (email available below). General contact details of provider: https://edirc.repec.org/data/deavept.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.