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Derivative Pricing and Hedging on Carbon Market

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  • Marius-Cristian Frunza

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Sagacarbon - Sagacarbon SA)

  • Dominique Guegan

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

Abstract

The aim of this work is to bring an econometric approach upon the CO2 market. We identify the specificities of this market, and analyze the carbon as a commodity. We investigate the econometric particularities of CO2 prices behavior and their result of the calibration. We apprehend and explain the reasons of the non-Gaussian behavior of this market focusing mainly upon jump diffusions and generalized hyperbolic distributions. These models are used for pricing and hedging of carbon options. We estimate the pricing accuracy of each model and the capacity to provide an efficient dynamic hedging.

Suggested Citation

  • Marius-Cristian Frunza & Dominique Guegan, 2010. "Derivative Pricing and Hedging on Carbon Market," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00461474, HAL.
  • Handle: RePEc:hal:cesptp:halshs-00461474
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00461474
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    Keywords

    Carbon; Normal Inverse Gaussian; CER; EUA; swap.; Carbone; distribution NIG;

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