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An economic view of carbon allowances market

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Abstract

The aim of this work is to bring an econometric approach upon the CO2 market. We identify the specificities of this market, and regarding the carbon as a commodity. We investigate the econometric particularities of CO2 prices behavior and their result of the calibration. We apprehend and explain the reasons of the non-Gaussian behavior of this market focusing mainly upon jump diffusion and generalized hyperbolic distributions. We test these results for the risk modeling of a structured product specific to the carbon market, the swap between two carbon instruments : The European Union Allowances and the Certiified Emission Reductions. We estimate the counterparty risk for this kind of transaction and evaluate the impact of different models upon the risk measure and the allocated capital.

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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2009/09038.pdf
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Bibliographic Info

Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 09038.

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Length: 36 pages
Date of creation: May 2009
Date of revision:
Handle: RePEc:mse:cesdoc:09038

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Keywords: Carbon; Normal Inverse Gaussian; CER; EUA; Swap.;

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