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Nonlinearity in cap-and-trade systems: The EUA price and its fundamentals

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  • Lutz, Benjamin Johannes
  • Pigorsch, Uta
  • Rotfuß, Waldemar

Abstract

In this paper we examine the nonlinear relation between the EUA price and its fundamentals, such as energy prices, macroeconomic risk factors and weather conditions. By estimating a Markov regime-switching model, we find that the relation between the EUA price and its fundamentals varies over time. In particular, we are able to identify a low and a high volatility regime, both showing a strong impact of the fundamentals on the EUA price. The high volatility regime is predominant during the recession of 2008 and 2009 - a time period in which the actual emissions sharply decreased due to the economic crisis. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 13-001.

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Date of creation: 2013
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Handle: RePEc:zbw:zewdip:13001

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Keywords: EU ETS; EUA Price Fundamentals; Markov Regime-Switching;

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  1. 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.
  2. Massimo Peri & Lucia Baldi, 2011. "Nonlinear price dynamics between CO2 futures and Brent," Applied Economics Letters, Taylor and Francis Journals, vol. 18(13), pages 1207-1211.
  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. Gernot Klepper & Sonja Peterson, 2004. "The EU Emissions Trading Scheme: Allowance Prices, Trade Flows, Competitiveness Effects," Kiel Working Papers 1195, Kiel Institute for the World Economy.
  5. Hintermann, Beat, 2010. "Allowance price drivers in the first phase of the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 43-56, January.
  6. Bredin, Don & Muckley, Cal, 2011. "An emerging equilibrium in the EU emissions trading scheme," Energy Economics, Elsevier, vol. 33(2), pages 353-362, March.
  7. Demailly, Damien & Quirion, Philippe, 2008. "European Emission Trading Scheme and competitiveness: A case study on the iron and steel industry," Energy Economics, Elsevier, vol. 30(4), pages 2009-2027, July.
  8. Thomas Mikosch & Catalin Starica, 2004. "Non-stationarities in financial time series, the long range dependence and the IGARCH effects," Econometrics 0412005, EconWPA.
  9. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22.
  10. Paolella, Marc S. & Taschini, Luca, 2008. "An econometric analysis of emission allowance prices," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2022-2032, October.
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