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Options introduction and volatility in the EU ETS

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Author Info
Julien CHEVALLIER
Yannick LE PEN
Benoît SEVI

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Abstract

To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identification of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had no effect on the volatility in the EU ETS. These findings are robust to other likely influences linked to energy and commodity markets.

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Publisher Info
Paper provided by CREDEN (Centre de Recherche en Economie et Droit de l'Energie), Faculty of Economics, University of Montpellier 1 in its series Cahiers du CREDEN (CREDEN Working Papers) with number 09.07.85.

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Length: 27 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:mop:credwp:09.07.85

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Postal: Université de Montpellier 1, Faculté des Sciences Economiques, CREDEN, Av. de la Mer - Espace Richter, CS 79606, 34960 Montpellier Cedex 2, France
Phone: 33 (0)4 67 15 83 60
Fax: 33 (0)4 67 15 84 04
Web page: http://www.creden.univ-montp1.fr
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Related research
Keywords: EU ETS; Option prices; volatility; GARCH; rolling estimation; endogenous structural break detection;

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Find related papers by JEL classification:
Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics
Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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    Other versions:
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