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Modelling the convenience yield in carbon prices using daily and realized measures

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  • Julien Chevallier

    ()
    (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre)

Abstract

This article investigates the modelling of the convenience yield in the European carbon market by using daily and intradaily measures of volatility. The convenience yield stems from differences in spot and futures prices, and can explain why firms hold inventories. The main findings are that (i) a simple AR(4) process best describes the 2008 convenience yield, and (ii) there exists a non linear relation between spot and futures prices. The approach developed in this article captures 74% of the explanatory power for the 2008 convenience yield variable in an autoregressive framework, with carbon spot price levels, moving averages and carbon futures realized volatility measures as exogenous regressors. These results are of interest for energy utilities, risk-managers, and traders exposed to the variation of carbon prices.

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Paper provided by HAL in its series Working Papers with number halshs-00463921.

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Date of creation: 15 Mar 2010
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Handle: RePEc:hal:wpaper:halshs-00463921

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Keywords: Convenience Yield; Carbon Price; EU ETS; High frequency Data; Realized Volatility;

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  1. Szymon Borak & Wolfgang Härdle & Stefan Trück & Rafal Weron, 2006. "Convenience Yields for CO2 Emission Allowance Futures Contracts," SFB 649 Discussion Papers SFB649DP2006-076, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Hansen, Peter R. & Lunde, Asger, 2006. "Realized Variance and Market Microstructure Noise," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 127-161, April.
  3. Chevallier, Julien, 2009. "Carbon futures and macroeconomic risk factors: A view from the EU ETS," Energy Economics, Elsevier, vol. 31(4), pages 614-625, July.
  4. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold, 2007. "Roughing It Up: Including Jump Components in the Measurement, Modeling, and Forecasting of Return Volatility," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 701-720, November.
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  6. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2003. "Modeling and Forecasting Realized Volatility," Econometrica, Econometric Society, vol. 71(2), pages 579-625, March.
  7. Sévi, Benoît & Chevallier, Julien, 2011. "On the realized volatility of the ECX CO2 emissions 2008 futures contract: distribution, dynamics and forecasting," Economics Papers from University Paris Dauphine 123456789/4598, Paris Dauphine University.
  8. Geman, Hélyette & Ohana, Steve, 2009. "Forward curves, scarcity and price volatility in oil and natural gas markets," Energy Economics, Elsevier, vol. 31(4), pages 576-585, July.
  9. Ole E. Barndorff-Nielsen & Neil Shephard, 2000. "Econometric analysis of realised volatility and its use in estimating stochastic volatility models," Economics Papers 2001-W4, Economics Group, Nuffield College, University of Oxford, revised 05 Jul 2001.
  10. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  11. Chevallier, Julien & Ielpo, Florian & Mercier, Ludovic, 2009. "Risk aversion and institutional information disclosure on the European carbon market : a case-study of the 2006 compliance event," Economics Papers from University Paris Dauphine 123456789/4221, Paris Dauphine University.
  12. Chevallier, Julien & Sévi, Benoît, 2010. "Jump-robust estimation of realized volatility in the EU emissions trading scheme," Economics Papers from University Paris Dauphine 123456789/4596, Paris Dauphine University.
  13. Zhang, Lan & Mykland, Per A. & Ait-Sahalia, Yacine, 2005. "A Tale of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 1394-1411, December.
  14. Emilie Alberola & Julien Pierre Chevallier, 2007. "European carbon prices and banking restrictions: evidence from phase I (2005-2007)," EconomiX Working Papers 2007-32, University of Paris West - Nanterre la Défense, EconomiX.
  15. Chiou Wei, Song Zan & Zhu, Zhen, 2006. "Commodity convenience yield and risk premium determination: The case of the U.S. natural gas market," Energy Economics, Elsevier, vol. 28(4), pages 523-534, July.
  16. Alberola, Emilie & Chevallier, Julien & Cheze, Benoi^t, 2008. "Price drivers and structural breaks in European carbon prices 2005-2007," Energy Policy, Elsevier, vol. 36(2), pages 787-797, February.
  17. Zhou, Bin, 1996. "High-Frequency Data and Volatility in Foreign-Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 45-52, January.
  18. Stronzik, Marcus & Rammerstorfer, Margarethe & Neumann, Anne, 2009. "Does the European natural gas market pass the competitive benchmark of the theory of storage? Indirect tests for three major trading points," Energy Policy, Elsevier, vol. 37(12), pages 5432-5439, December.
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