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Carbon price analysis using empirical mode decomposition

  • Bangzhu Zhu
  • Ping Wang
  • Julien Chevallier
  • Yiming Wei

Mastering the underlying characteristics of carbon price changes can help governments formulate correct policies to keep efficient operation of carbon markets, and investors take effective measures to evade their investment risks. Empirical mode decomposition (EMD), a self-adaption data analysis approach for nonlinear and non-stationary time series, can accurately explain the formation mechanism of carbon price by decomposing it into several intrinsic mode functions (IMFs) and one residue from different scales. In this study, we apply EMD to the European Union Emissions Trading Scheme (EU ETS) carbon price analysis. First, the carbon price is decomposed into eight IMFs and one residue. Moreover, these IMFs and residue are reconstructed into a high frequency component, a low frequency component and a trend component using hierarchical clustering method. The economic meanings of these three components are identified as short term market fluctuations, effects of significant trend breaks, and a long-term trend, respectively. Finally, some strategies are proposed for carbon price forecasting.

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Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-156.

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Length: 12 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-156
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  6. Lutz, Benjamin Johannes & Pigorsch, Uta & Rotfuß, Waldemar, 2013. "Nonlinearity in cap-and-trade systems: The EUA price and its fundamentals," ZEW Discussion Papers 13-001 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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  14. Bangzhu Zhu, 2012. "A Novel Multiscale Ensemble Carbon Price Prediction Model Integrating Empirical Mode Decomposition, Genetic Algorithm and Artificial Neural Network," Energies, MDPI, Open Access Journal, vol. 5(2), pages 355-370, February.
  15. Creti, Anna & Jouvet, Pierre-André & Mignon, Valérie, 2012. "Carbon price drivers: Phase I versus Phase II equilibrium?," Energy Economics, Elsevier, vol. 34(1), pages 327-334.
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  19. Arouri, Mohamed El Hédi & Jawadi, Fredj & Nguyen, Duc Khuong, 2012. "Nonlinearities in carbon spot-futures price relationships during Phase II of the EU ETS," Economic Modelling, Elsevier, vol. 29(3), pages 884-892.
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