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Nonlinearity in cap-and-trade systems: The EUA price and its fundamentals

  • Lutz, Benjamin Johannes
  • Pigorsch, Uta
  • Rotfuß, Waldemar

In this paper we examine the nonlinear relation between the EUA price and its fundamentals, such as energy prices, macroeconomic risk factors and weather conditions. By estimating a Markov regime-switching model, we find that the relation between the EUA price and its fundamentals varies over time. In particular, we are able to identify a low and a high volatility regime, both showing a strong impact of the fundamentals on the EUA price. The high volatility regime is predominant during the recession of 2008 and 2009 - a time period in which the actual emissions sharply decreased due to the economic crisis.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 13-001.

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Date of creation: 2013
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Handle: RePEc:zbw:zewdip:13001
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