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Cointegration between carbon spot and futures prices: from linear to nonlinear modeling

Author

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  • Julien Chevallier

    (University Paris Dauphine)

Abstract

This paper develops two nonlinear cointegration models - a VECM with structural shift and a threshold cointegration model - applied to carbon spot and futures prices. The results extend the previous findings by Chevallier (2010), who studied this topic with a linear VECM. First, in the VECM with structural shift, we observe that the returns of carbon spot and futures prices correct the deviations to the long-term equilibrium, with the futures price being the leader in the price discovery. Besides, we identify a breakpoint in July 2008, which may be related to the financial crisis and its effects on the carbon market. Second, we use Hansen and Seo's (2002) methodology, which points out the need to consider threshold cointegration models. We find strong error-correction effects for the carbon futures price. Asymmetry is implied in the sense that the carbon futures price governs most of the adjustment from the short-run to the long-run equilibrium of the model above or below the estimated threshold.

Suggested Citation

  • Julien Chevallier, 2012. "Cointegration between carbon spot and futures prices: from linear to nonlinear modeling," Economics Bulletin, AccessEcon, vol. 32(1), pages 160-181.
    • Handle: RePEc:ebl:ecbull:eb-11-00808
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    References listed on IDEAS

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    2. Benschopa, Thijs & López Cabreraa, Brenda, 2014. "Volatility modelling of CO2 emission allowance spot prices with regime-switching GARCH models," SFB 649 Discussion Papers 2014-050, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    3. Xu, Jia & Tan, Xiujie & He, Gang & Liu, Yu, 2019. "Disentangling the drivers of carbon prices in China's ETS pilots — An EEMD approach," Technological Forecasting and Social Change, Elsevier, vol. 139(C), pages 1-9.
    4. Gil-Alana, Luis A. & Gupta, Rangan & de Gracia, Fernando Perez, 2016. "Modeling persistence of carbon emission allowance prices," Renewable and Sustainable Energy Reviews, Elsevier, vol. 55(C), pages 221-226.
    5. Cong, Ren & Lo, Alex Y., 2017. "Emission trading and carbon market performance in Shenzhen, China," Applied Energy, Elsevier, vol. 193(C), pages 414-425.

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    More about this item

    Keywords

    Cointegration; VECM with Structural Shift; Threshold Cointegration; Carbon Price; Spot Price; Futures Price;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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