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Dynamic factor analysis of carbon allowances prices: From classic Arbitrage Pricing Theory to Switching Regimes

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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)

  • Antonin Lassoudière

    () (Sagacarbon - Sagacarbon SA)

Abstract

The aim of this paper is to identify the fundamental factors that drive the allowances market and to built an APT-like model in order to provide accurate forecasts for CO2. We show that historic dependency patterns emphasis energy, natural gas, oil, coal and equity indexes as major factors driving the carbon allowances prices. There is strong evidence that model residuals are heavily tailed and asymmetric, thereby generalized hyperbolic distribution provides with the best fit results. Introducing dynamics inside the parameters of the APT model via a Hidden Markov Chain Model outperforms the results obtained with a static approach. Empirical results clearly indicate that this model could be used for price forecasting, that it is effective in and out of sample producing consisten results in allowances futures price prediction.

Suggested Citation

  • Marius-Cristian Frunza & Dominique Guegan & Antonin Lassoudière, 2010. "Dynamic factor analysis of carbon allowances prices: From classic Arbitrage Pricing Theory to Switching Regimes," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00505145, HAL.
  • Handle: RePEc:hal:cesptp:halshs-00505145
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00505145
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    References listed on IDEAS

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    1. Abdou Kâ Diongue & Dominique Guegan & Rodney C. Wolff, 2010. "BL-GARCH model with elliptical distributed innovations," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00368340, HAL.
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    Cited by:

    1. Marius-Cristian Frunza & Dominique Guegan & Fabrice Thiebaut, 2010. "Missing trader fraud on the emissions market," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00523512, HAL.
    2. repec:hal:journl:halshs-00523512 is not listed on IDEAS

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