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Futures price dynamics of CO 2 emission allowances

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  • Marcel Gorenflo

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Abstract

We analyze the pricing and lead–lag relationship between spot and futures prices of CO 2 emission allowances in the EU emission trading scheme. We show that the cost-of-carry hypothesis between spot and futures prices holds for the trial period. In this period we focus on how fast a deviation from equilibrium due to shocks is restored. We derive testable restrictions on the loading coefficients and the short term dynamics within a vector error correction model. Previous studies in this field did not take into account the effects of lagged differences in the determination of the speed of adjustment. The results indicate that deviations from equilibrium are restored faster for the futures price series maturing in 2006 than for the futures price series maturing in 2007. Furthermore, we conduct an impulse response analysis using local projections with conditional confidence bands. Finally, we give an outlook for the Kyoto commitment period which is already running. In this time period so far we find that the cost-of-carry hypothesis does not hold. Copyright Springer-Verlag Berlin Heidelberg 2013

Suggested Citation

  • Marcel Gorenflo, 2013. "Futures price dynamics of CO 2 emission allowances," Empirical Economics, Springer, vol. 45(3), pages 1025-1047, December.
  • Handle: RePEc:spr:empeco:v:45:y:2013:i:3:p:1025-1047
    DOI: 10.1007/s00181-012-0645-6
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    Cited by:

    1. Segnon, Mawuli & Lux, Thomas & Gupta, Rangan, 2017. "Modeling and forecasting the volatility of carbon dioxide emission allowance prices: A review and comparison of modern volatility models," Renewable and Sustainable Energy Reviews, Elsevier, vol. 69(C), pages 692-704.
    2. Kanamura, Takashi, 2016. "Role of carbon swap trading and energy prices in price correlations and volatilities between carbon markets," Energy Economics, Elsevier, vol. 54(C), pages 204-212.

    More about this item

    Keywords

    Cointegration; Futures price dynamics; CO 2 emission allowances; C32; G15;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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