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What Moves the European Carbon Market? - Insights from Conditional Jump Models

  • Marc Gronwald
  • Janina Ketterer

This paper is concerned with carbon price volatility and the underlying causes of large price movements in the European emissions trading market. Based on the application of a combined jump-GARCH model the behavior of EUA prices is characterized. The jump-GARCH model explains the unsteady carbon price movement well and, moreover, shows that between 40 and 60 percent of the carbon price variance are triggered by jumps. Information regarding EUA supply and news from international carbon markets are identified as importantdrivers of these price spikes. These results can lead regulators the way if smoother carbon prices are desired.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-04/cesifo1_wp3795.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3795.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3795
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  1. Marc Gronwald, 2011. "A Characterization of Oil Price Behavior - Evidence from Jump Models," CESifo Working Paper Series 3644, CESifo Group Munich.
  2. Chevallier, Julien, 2011. "Detecting instability in the volatility of carbon prices," Energy Economics, Elsevier, vol. 33(1), pages 99-110, January.
  3. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  4. Karsten Neuhoff & Kim Keats Martinez & Misato Sato, 2006. "Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 73-91, January.
  5. Daskalakis, George & Psychoyios, Dimitris & Markellos, Raphael N., 2009. "Modeling CO2 emission allowance prices and derivatives: Evidence from the European trading scheme," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1230-1241, July.
  6. Beat Hintermann, 2009. "Allowance Price Drivers in the First Phase of the EU ETS," CEPE Working paper series 09-63, CEPE Center for Energy Policy and Economics, ETH Zurich.
  7. Emilie Alberola & Julien Chevallier, 2009. "European Carbon Prices and Banking Restrictions: Evidence from Phase I (2005-2007)," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 51-80.
  8. Wing H. Chan, 2003. "A correlated bivariate Poisson jump model for foreign exchange," Empirical Economics, Springer, vol. 28(4), pages 669-685, November.
  9. Conrad, Christian & Rittler, Daniel & Rotfuß, Waldemar, 2012. "Modeling and explaining the dynamics of European Union Allowance prices at high-frequency," Energy Economics, Elsevier, vol. 34(1), pages 316-326.
  10. Samuel Fankhauser & Cameron Hepburn & Jisung Park, 2010. "Combining Multiple Climate Policy Instruments: How Not To Do It," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 1(03), pages 209-225.
  11. Jui-Cheng Hung & Shi-Jie Jiang & Chien-Liang Chiu, 2007. "Jump risk of Presidential election: evidence from Taiwan stock and foreign exchange markets," Applied Economics, Taylor & Francis Journals, vol. 39(17), pages 2231-2240.
  12. 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.
  13. Wing H. Chan & Denise Young, 2006. "Jumping hedges: An examination of movements in copper spot and futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(2), pages 169-188, 02.
  14. Chan, Wing H & Maheu, John M, 2002. "Conditional Jump Dynamics in Stock Market Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 377-89, July.
  15. Marc Gronwald & Janina Ketterer & Stefan Trück, 2011. "The Relationship between Carbon, Commodity and Financial Markets: A Copula Analysis," The Economic Record, The Economic Society of Australia, vol. 87(s1), pages 105-124, 09.
  16. 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.
  17. Chan, Wing H., 2004. "Conditional correlated jump dynamics in foreign exchange," Economics Letters, Elsevier, vol. 83(1), pages 23-28, April.
  18. Lee, Yen-Hsien & Hu, Hsu-Ning & Chiou, Jer-Shiou, 2010. "Jump dynamics with structural breaks for crude oil prices," Energy Economics, Elsevier, vol. 32(2), pages 343-350, March.
  19. Philippe Jorion, 1988. "On Jump Processes in the Foreign Exchange and Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 1(4), pages 427-445.
  20. Julien Chevallier, 2012. "Banking And Borrowing In The Eu Ets: A Review Of Economic Modelling, Current Provisions And Prospects For Future Design," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 157-176, 02.
  21. repec:dau:papers:123456789/4210 is not listed on IDEAS
  22. repec:dau:papers:123456789/4596 is not listed on IDEAS
  23. repec:dau:papers:123456789/5110 is not listed on IDEAS
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