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The forecasting accuracy of implied volatility from ECX carbon options

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  • Viteva, Svetlana
  • Veld-Merkoulova, Yulia V.
  • Campbell, Kevin

Abstract

This study analyzes the forecasting accuracy of the implied volatility of options on futures contracts for the delivery of CO2 emission allowances (carbon options) traded on the European Climate Exchange. We demonstrate that option implied volatility is highly informative about the variance of returns realized over the remaining life of the options. It is also directionally accurate in predicting future volatility changes. However, we also find that implied volatility of carbon options is biased, especially for periods of time which do not coincide with the remaining life of the option. This suggests that the market has yet to fully mature.

Suggested Citation

  • Viteva, Svetlana & Veld-Merkoulova, Yulia V. & Campbell, Kevin, 2014. "The forecasting accuracy of implied volatility from ECX carbon options," Energy Economics, Elsevier, vol. 45(C), pages 475-484.
  • Handle: RePEc:eee:eneeco:v:45:y:2014:i:c:p:475-484
    DOI: 10.1016/j.eneco.2014.08.005
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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. Tan, Xue-Ping & Wang, Xin-Yu, 2017. "Dependence changes between the carbon price and its fundamentals: A quantile regression approach," Applied Energy, Elsevier, vol. 190(C), pages 306-325.

    More about this item

    Keywords

    Carbon options; Implied volatility; Volatility forecasting; EU Emissions Trading Scheme;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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