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Random sources correlations and carbon futures pricing

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  • Feng, Ling
  • Wang, Jieyu

Abstract

For a long time, the correlation between random sources has never been considered in carbon futures pricing, which virtually exists. We document the presence of high correlation between variations in convenience yields of carbon futures with different maturities, whose essence is correlation between random sources. Correlation of random sources arises from the long coverage of convenience yield of carbon emission spot and the complementarity in expiration between carbon futures with different maturities. Since if random sources are correlated will significantly affect the dynamics of convenience yield and finally affect futures prices, we introduce quantum field method to account for the impact of this correlation on futures prices, and proposes the correlation between random sources extended HJM convenience yield model (CRS-HJM-CYM). Empirical results indicate CRS-HJM-CYM performs better than traditional model owing to the role of correlation, which means the correlation between random sources is a pivotal factor in carbon futures pricing.

Suggested Citation

  • Feng, Ling & Wang, Jieyu, 2023. "Random sources correlations and carbon futures pricing," International Review of Financial Analysis, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:finana:v:86:y:2023:i:c:s1057521923000455
    DOI: 10.1016/j.irfa.2023.102529
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    More about this item

    Keywords

    Correlation between random sources; Carbon futures pricing; Quantum field theory; Convenience yield;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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