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Variance risk-premia in CO2 markets

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  • Chevallier, Julien

Abstract

This paper proposes a new methodology to measure the volatility of CO2 assets computed as the difference between model-free implied volatility (from option prices) and model-free realized volatility (from high-frequency intraday data), coined as ‘variance risk-premia’ (Carr and Wu, 2009; Bollerslev et al., 2009; Trolle and Schwartz, 2010), during 2008–2011. We find that variance risk-premia are equal to a daily sample average of 0.79 for European Union Allowances and 0.18 for Certified Emissions Reductions. In the spirit of the CAPM, we show that the beta can only explain a small portion, and that macro risk factors specific to CO2 markets and energy volatilities can improve this result. Hence, there exists a systematic variance risk factor in CO2 markets that asks for a highly risk premium. Further analysis shows that variance risk-premia are time-varying, and can be used as strong predictors for forecasting CO2 returns.

Suggested Citation

  • Chevallier, Julien, 2013. "Variance risk-premia in CO2 markets," Economic Modelling, Elsevier, vol. 31(C), pages 598-605.
    • Handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:598-605
    DOI: 10.1016/j.econmod.2012.12.017
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    Cited by:

    1. repec:spr:ieaple:v:18:y:2018:i:5:d:10.1007_s10784-018-9411-3 is not listed on IDEAS
    2. Yue-Jun Zhang, 2016. "Research on carbon emission trading mechanisms: current status and future possibilities," International Journal of Global Energy Issues, Inderscience Enterprises Ltd, vol. 39(1/2), pages 89-107.
    3. repec:eee:ecmode:v:71:y:2018:i:c:p:68-79 is not listed on IDEAS
    4. Getachew Nigatu, 2016. "Assessing the effects of climate change policy on the volatility of carbon prices in reference to the Great Recession," Journal of Environmental Economics and Policy, Taylor & Francis Journals, vol. 5(2), pages 200-215, July.

    More about this item

    Keywords

    Variance risk-premia; CO2 market; Model-free implied volatility; Realized volatility; Forecasting; EUA; CER; EU ETS; CDM; Energy volatilities;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G1 - Financial Economics - - General Financial Markets
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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