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Dynamic factor analysis of carbon allowances prices : From classic Arbitrage Pricing Theory to Switching Regimes

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Abstract

The aim of this paper is to identify the fundamental factors that drive the allowances market and to built an APT-like model in order to provide accurate forecasts for CO2. We show that historic dependency patterns emphasis energy, natural gas, oil, coal and equity indexes as major factors driving the carbon allowances prices. There is strong evidence that model residuals are heavily tailed and asymmetric, thereby generalized hyperbolic distribution provides with the best fit results. Introducing dynamics inside the parameters of the APT model via a Hidden Markov Chain Model outperforms the results obtained with a static approach. Empirical results clearly indicate that this model could be used for price forecasting, that it is effective in and out of sample producing consisten results in allowances futures price prediction.

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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2010/10062.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 10062.

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Length: 21 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:mse:cesdoc:10062

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Keywords: Carbon; EUA; energy; Arbitrage Pricing Theory; switching regimes; hidden Markov Chain model; forecast.;

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  1. repec:hal:cesptp:halshs-00368340 is not listed on IDEAS
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Cited by:
  1. Marius-Cristian Frunza & Dominique Guegan & Fabrice Thiebaut, 2010. "Missing trader fraud on the emissions market," Documents de travail du Centre d'Economie de la Sorbonne 10071, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. repec:hal:journl:halshs-00523512 is not listed on IDEAS
  3. repec:hal:cesptp:halshs-00523512 is not listed on IDEAS

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