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Modeling the dynamics of European carbon futures price: a Zipf analysis

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Author Info

  • Bangzhu Zhu
  • Shujiao Ma
  • Julien Chevallier
  • Yiming Wei

Abstract

This article investigates the European carbon futures price dynamics by applying the Zipf analysis. The results show that: first, carbon price behaviour is asymmetric, and the long-term bearish probability is greater than the long-term bullish probability. Second, time-scales of investment and speculators’ expectations of returns have dual effects on carbon price behaviour. The longer time-scales of investment, the higher the bearish probability. The lower expectations of returns, the smaller the distortion of carbon price behaviour. Third, the differences in carbon market cognitions from non-greedy speculators with different expectations of returns mainly lie in the amplitudes and occasions of carbon price fluctuations, rather than carbon price fluctuations themselves. Fourth, speculators’ expectations of returns have critical points. Once the critical points are reached, they will no longer be able to distort carbon price behaviour. Finally, we discuss some investment advice for supports of the decision-makers. For non-greedy-type speculators, they will choose to hold negatively in the short term and buy and hold in the long term, while for greedy-type speculators they will sell their European Union Allowances (EUAs) in the short term, and buy and hold in the long term. The results are helpful to hedge against unwanted carbon price movements, and to understand the transactions between different types of agents.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-155.

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Length: 19 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-155

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Keywords: EU ETS; carbon futures price; Zipf analysis; expectation of return; time-scale of investment;

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References

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  1. Anna Creti & Pierre-André Jouvet & Valérie Mignon, 2011. "Carbon Price Drivers: Phase I versus Phase II Equilibrium?," Working Papers 1106, Chaire Economie du Climat.
  2. Alberola, Emilie & Chevallier, Julien & Chèze, Benoît, 2008. "Price drivers and structural breaks in European carbon prices 2005-07," Economics Papers from University Paris Dauphine 123456789/4222, Paris Dauphine University.
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  7. Yue-Jun Zhang & Yi-Ming Wei, 2009. "An overview of current research on EU ETS: Evidence from its operating mechanism and economic effect," CEEP-BIT Working Papers, Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology 3, Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology.
  8. Conrad, Christian & Rittler, Daniel & Rotfuß, Waldemar, 2010. "Modeling and explaining the dynamics of European Union allowance prices at high-frequency," ZEW Discussion Papers 10-038, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  9. Paolella, Marc S. & Taschini, Luca, 2008. "An econometric analysis of emission allowance prices," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(10), pages 2022-2032, October.
  10. 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," Energy Policy, Elsevier, Elsevier, vol. 37(1), pages 15-28, January.
  11. Alberola, Emilie & Chevallier, Julien & Cheze, Benoi^t, 2008. "Price drivers and structural breaks in European carbon prices 2005-2007," Energy Policy, Elsevier, Elsevier, vol. 36(2), pages 787-797, February.
  12. Xiao, Di & Wang, Jun, 2012. "Modeling stock price dynamics by continuum percolation system and relevant complex systems analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 391(20), pages 4827-4838.
  13. Chevallier, Julien, 2009. "Carbon futures and macroeconomic risk factors: A view from the EU ETS," Energy Economics, Elsevier, Elsevier, vol. 31(4), pages 614-625, July.
  14. Bangzhu Zhu, 2012. "A Novel Multiscale Ensemble Carbon Price Prediction Model Integrating Empirical Mode Decomposition, Genetic Algorithm and Artificial Neural Network," Energies, MDPI, Open Access Journal, vol. 5(2), pages 355-370, February.
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  16. Vandewalle, N. & Ausloos, M., 1999. "The n-Zipf analysis of financial data series and biased data series," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 268(1), pages 240-249.
  17. Chevallier, Julien, 2011. "Nonparametric modeling of carbon prices," Energy Economics, Elsevier, Elsevier, vol. 33(6), pages 1267-1282.
  18. Alvarez-Ramirez, Jose & Soriano, Angel & Cisneros, Myriam & Suarez, Rodolfo, 2003. "Symmetry/anti-symmetry phase transitions in crude oil markets," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 322(C), pages 583-596.
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Citations

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Cited by:
  1. Anis Omri & Duc Khuong Nguyen, 2014. "On the determinants of renewable energy consumption: International Evidence," Working Papers, Department of Research, Ipag Business School 2014-535, Department of Research, Ipag Business School.
  2. Mohamed El Hedi Arouri & Adel Ben Youssef & Hatem M'Henni & Christophe Rault, 2014. "Energy Use and Economic Growth in Africa: A Panel Granger-Causality Investigation," CESifo Working Paper Series 4844, CESifo Group Munich.
  3. Ahmed Atil & Amine Lahiani & Duc Khuong Nguyen, 2014. "Asymmetric and nonlinear passthrough of crude oil prices to gasoline and natural gas prices," Working Papers, Department of Research, Ipag Business School 2014-569, Department of Research, Ipag Business School.
  4. Farhani, Sahbi & Shahbaz, Muhammad & AROURI, Mohamed El Hedi, 2013. "Panel analysis of CO2 emissions, GDP, energy consumption, trade openness and urbanization for MENA countries," MPRA Paper 49258, University Library of Munich, Germany, revised 20 Aug 2013.
  5. Ihtisham Abdul Malik & Ghamz-e-Ali Siyal & Alias Bin Abdullah & Arif Alam & Khalid Zaman, 2014. "Turn on the Lights: Macroeconomic Factors Affecting Renewable in Pakistan," Working Papers, Department of Research, Ipag Business School 2014-518, Department of Research, Ipag Business School.
  6. Besma Talbi & Duc Khuong Nguyen, 2014. "An Empirical Analysis of Energy Demand in Tunisia," Economics Bulletin, AccessEcon, vol. 34(1), pages 452-458.
  7. Mehmet Balcılar & Rıza Demirer & Shawkat Hammoudeh & Duc Khuong Nguyen, 2014. "Risk Spillovers across the Energy and Carbon Markets and Hedging Strategies for Carbon Risk," Working Papers, Department of Research, Ipag Business School 2014-552, Department of Research, Ipag Business School.
  8. Loganathan, Nanthakumar & Muhammad Shahbaz & Roshaiza Taha, 2014. "The Effect Of Green Taxation And Economic Growth On Environment Hazards: The Case Of Malaysia," Working Papers, Department of Research, Ipag Business School 2014-494, Department of Research, Ipag Business School.
  9. Sahbi Farhani & Muhammad Shahbaz, 2014. "What role of renewable and nonrenewable electricity consumption and output is needed to initially mitigate CO2 emissions in MENA region?," Working Papers, Department of Research, Ipag Business School 2014-455, Department of Research, Ipag Business School.
  10. Mohamed Arouri & Christophe Rault & Frédéric Teulon, 2014. "Economic policy uncertainty, oil price shocks and GCC stock markets," Economics Bulletin, AccessEcon, vol. 34(3), pages 1822-1834.
  11. Ahdi N. Ajmi & Shawkat Hammoudeh & Ahmed A. A. Khalifa & Duc K. Nguyen, 2014. "Causality across international equity and commodity markets: When asymmetry and nonlinearity matter," Working Papers, Department of Research, Ipag Business School 2014-546, Department of Research, Ipag Business School.
  12. Walid Chkili & Chaker Aloui & Duc Khuong Nguyen, 2014. "Instabilities in the relationships and hedging strategies between crude oil and US stock markets: do long memory and asymmetry matter?," Working Papers, Department of Research, Ipag Business School 2014-549, Department of Research, Ipag Business School.
  13. Duc Khuong Nguyen & Ricardo M. Sousa & Gazi Salah Uddin, 2014. "Testing for asymmetric causality from U.S. equity returns to commodity futures returns," Working Papers, Department of Research, Ipag Business School 2014-545, Department of Research, Ipag Business School.
  14. Lanouar Charfeddine & Rafik Jbir & Jihane Karboul, 2014. "Price convergence and integration in the Germany, France and Italy electricity markets," Working Papers, Department of Research, Ipag Business School 2014-502, Department of Research, Ipag Business School.

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