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On the Stochastic Properties of Carbon Futures Prices

  • Julien Chevallier

    ()

    (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense)

  • Benoît Sévi

    (GRANEM - Department of Law, Economics, and Management - Université d'Angers)

Pricing carbon is a central concern in environmental economics, due to the importance of emissions trading schemes worldwide to regulate pollution. This paper documents the presence of small and large jumps in the stochastic process of the CO2 futures price. The large jumps have a discrete origin, i.e. they can arise from various demand factors or institutional decisions on the tradable permits market. Contrary to the previously established literature, we show that the stochastic process of the carbon futures prices does not contain a continuous component (Brownian motion). The results are derived by using high-frequency data in the activity signature function framework (Todorov and Tauchen (2010, 2011)). The implication is that the carbon futures price should be rather modelled as an appropriately sampled, centered Lévy or Poisson process. The pure-jump behavior of the carbon price could be explained by the lower volume of trades on this allowance market (compared to other highly liquid financial markets).

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Paper provided by HAL in its series Working Papers with number halshs-00720166.

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Date of creation: Mar 2012
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Handle: RePEc:hal:wpaper:halshs-00720166
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