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"Interest Rate Trap", or: Why Does the Central Bank Keep the Policy Rate too Low for too Long Time?

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Author Info

  • Jin Cao
  • Gerhard Illing
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Abstract

This paper is concerned with carbon price volatility and the underlying causes of large price movements in the European emissions trading market. Based on the application of a combined jump-GARCH model the behavior of EUA prices is characterized. The jump-GARCH model explains the unsteady carbon price movement well and, moreover, shows that between 40 and 60 percent of the carbon price variance are triggered by jumps. Information regarding EUA supply and news from international carbon markets are identified as importantdrivers of these price spikes. These results can lead regulators the way if smoother carbon prices are desired.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-04/cesifo1_wp3794.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3794.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3794

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Related research

Keywords: emission allowance prices; GARCH; jumps; jump-induced variance;

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References

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  1. Douglas W. Diamond & Raghuram G. Rajan, 2012. "Illiquid Banks, Financial Stability, and Interest Rate Policy," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 552 - 591.
  2. Giavazzi, Francesco & Giovannini, Alberto, 2010. "Central Banks and the Financial System," CEPR Discussion Papers 7944, C.E.P.R. Discussion Papers.
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Cited by:
  1. Lukas Scheffknecht, 2013. "Contextualizing Systemic Risk," ROME Working Papers 201317, ROME Network.
  2. Jin Cao & LorĂ¡n Chollete, 2013. "Central Banking and Financial Stability in the Long Run," CESifo Working Paper Series 4272, CESifo Group Munich.

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