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On the Stochastic Properties of Carbon Futures Prices

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  • Julien Chevallier

    () (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Benoît Sévi

    (Granem - Groupe de Recherche ANgevin en Economie et Management - UA - Université d'Angers - AGROCAMPUS OUEST - Institut National de l'Horticulture et du Paysage)

Abstract

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).

Suggested Citation

  • Julien Chevallier & Benoît Sévi, 2012. "On the Stochastic Properties of Carbon Futures Prices," Working Papers halshs-00720166, HAL.
  • Handle: RePEc:hal:wpaper:halshs-00720166
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00720166v2
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    Citations

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    Cited by:

    1. Zied Ftiti & Aviral Tiwari & Amél Belanès & Khaled Guesmi, 2014. "Tests of Financial Market Contagion: Evolutionary Cospectral Analysis V.S. Wavelet Analysis," Working Papers 2014-577, Department of Research, Ipag Business School.
    2. repec:ipg:wpaper:2014-546 is not listed on IDEAS
    3. repec:ipg:wpaper:2014-565 is not listed on IDEAS
    4. repec:ipg:wpaper:2014-535 is not listed on IDEAS
    5. Julien Chevallier & Stéphane Goutte, 2014. "The goodness-of-fit of the fuel-switching price using the mean-reverting Lévy jump process," Working Papers 2014-285, Department of Research, Ipag Business School.
    6. Mason, Charles F. & A. Wilmot, Neil, 2014. "Jump processes in natural gas markets," Energy Economics, Elsevier, vol. 46(S1), pages 69-79.
    7. repec:ipg:wpaper:2014-545 is not listed on IDEAS
    8. repec:ipg:wpaper:2014-494 is not listed on IDEAS
    9. Balcılar, Mehmet & Demirer, Rıza & Hammoudeh, Shawkat & Nguyen, Duc Khuong, 2016. "Risk spillovers across the energy and carbon markets and hedging strategies for carbon risk," Energy Economics, Elsevier, vol. 54(C), pages 159-172.
    10. repec:spr:annopr:v:255:y:2017:i:1:d:10.1007_s10479-015-1967-5 is not listed on IDEAS
    11. repec:ipg:wpaper:2014-469 is not listed on IDEAS
    12. repec:ipg:wpaper:2014-549 is not listed on IDEAS
    13. Balietti, Anca Claudia, 2016. "Trader types and volatility of emission allowance prices. Evidence from EU ETS Phase I," Energy Policy, Elsevier, vol. 98(C), pages 607-620.
    14. repec:ipg:wpaper:2014-523 is not listed on IDEAS

    More about this item

    Keywords

    Carbon Price; Stochastic Modeling; Activity Signature Function;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G1 - Financial Economics - - General Financial Markets
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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