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Carbon market: Systematic risk and expectations of returns-on the comparison analysis of the CDM and EU ETS


  • Bao-Jun Tang
  • Cheng Shen


The paper uses Capital Asset Pricing Model (CAPM) to analyze the market risk in European Union Emission Trading System (EU ETS) and Clean Development Mechanisms (CDM) and Zipf analysis technology to analyze the carbon price volatility in different expectations of returns in the two markets. The results show that the systematic risk of the EU ETS market is at around 0.07%, but CDM market is clearly divided into two stages, the systematic risk of the futures contracts in the previous stage (DEC09-DEC12) is less than EUETS market, but systematic risk of the futures contracts that entered into the market is greater than the EUETS market and has a higher market sensitivity. But on the unsystematic risk, the CDM market is always greater than the EU ETS market. Abnormal returns in the two carbon markets are both lower than 0.02%, but CDM is higher. The probability of price down is higher than that of price up. Carbon price is affected by market mechanism and the external factor (economic crisis and environmental policies) in the low expectations of returns, but in the high expectations of returns, compared with the CDM market, the carbon price change in EU ETS market is more instable and higher risky.

Suggested Citation

  • Bao-Jun Tang & Cheng Shen, 2014. "Carbon market: Systematic risk and expectations of returns-on the comparison analysis of the CDM and EU ETS," CEEP-BIT Working Papers 49, Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology.
  • Handle: RePEc:biw:wpaper:49

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    References listed on IDEAS

    1. Alberola, Emilie & Chevallier, Julien & Cheze, Benoi^t, 2008. "Price drivers and structural breaks in European carbon prices 2005-2007," Energy Policy, Elsevier, vol. 36(2), pages 787-797, February.
    2. Chevallier, Julien & Ielpo, Florian & Mercier, Ludovic, 2009. "Risk aversion and institutional information disclosure on the European carbon market: A case-study of the 2006 compliance event," Energy Policy, Elsevier, vol. 37(1), pages 15-28, January.
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    More about this item


    European Union Emission Trading System (EU ETS); Clean Development Mechanisms (CDM); Systematic Risk; Expectations of Returns;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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