Understanding volatility dynamics in the EU-ETS market

María Eugenia Sanin Vázquez, Maria Mansanet-Bataller () and Francesco Violante ()
Additional contact information
Maria Mansanet-Bataller: Université Franche-Comté, Postal: 25009 Besancon, France

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We study the short-term price behavior of Phase 2 EU emission allowances. We model returns and volatility dynamics, and we demonstrate that a standard ARMAX-GARCH framework is inadequate for this modeling and that the gaussianity assumption is rejected due to a number of outliers. To improve the fitness of the model, we combine the underlying price process with an additive stochastic jump process. We improve the model's performance by introducing a time-varying jump probability that is explained by two variables: the daily relative change in the volume of transactions and the European Commission's announcements regarding the supply of permits. We show that (i) sharp increases in volume have led to increased volatility during the April 2005{December 2007period but not for the period beginning in January 2008, and (ii) announcements induce jumps in the process that tend to increase volatility across both periods. Thus, authorities face a trade off between disseminating information effectively and promoting market stability.

Keywords: EUA market; EU ETS; carbon emission trading; Garch model; normal mixture (search for similar items in EconPapers)
JEL-codes: C16 C32 C51 C53 Q52 Q53 (search for similar items in EconPapers)
Pages: 24
Date: 2015-01-12
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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Related works:
Journal Article: Understanding volatility dynamics in the EU-ETS market (2015)
Working Paper: Understanding volatility dynamics in the EU-ETS market (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2015-04

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