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Modeling and Forecasting Carbon Dioxide Emission Allowance Spot Price Volatility: Multifractal vs. GARCH-type Volatility Models

Author

Listed:
  • Segnon, Mawuli
  • Lux, Thomas
  • Gupta, Rangan
Abstract
This paper applies Markov-switching multifractal (MSM) processes to model and forecast carbon dioxide (CO2) emission price volatility, and compares their forecasting performance to the standard GARCH, fractionally integrated GARCH (FIGARCH) and the two-state Markov-switching GARCH (MS-GARCH) models via three loss functions (the mean squared error, the mean absolute error and the value-at-risk). We evaluate the performance of these models via the superior predictive ability test. We find that the forecasts based on the MSM model cannot be outperformed by its competitors under the vast majority of criteria and forecast horizons, while MS-GARCH mostly comes out as the least successful model. Applying various VaR backtesting procedures, we do, however, not find significant differences in the performance of the candidate models under this particular criterion. We also find that we cannot reject the null hypothesis of MSM forecasts encompassing those of GARCH-type models. In line with this result, optimally combined forecasts do indeed hardly improve upon the best single models in our sample.

Suggested Citation

  • Segnon, Mawuli & Lux, Thomas & Gupta, Rangan, 2015. "Modeling and Forecasting Carbon Dioxide Emission Allowance Spot Price Volatility: Multifractal vs. GARCH-type Volatility Models," FinMaP-Working Papers 46, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    • Handle: RePEc:zbw:fmpwps:46
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    carbon dioxide emission allowance prices; GARCH; Markov-switching GARCH; FIGARCH; multifractal Processes; SPA test; encompassing test; backtesting;
    All these keywords.

    JEL classification:

    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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