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Assessing the risk of the European Union carbon allowance market

Author

Listed:
  • Anupam Dutta
  • Naji Jalkh
  • Elie Bouri
  • Probal Dutta

Abstract

Purpose - The purpose of this paper is to examine the impact of structural breaks on the conditional variance of carbon emission allowance prices. Design/methodology/approach - The authors employ the symmetric GARCH model, and two asymmetric models, namely the exponential GARCH and the threshold GARCH. Findings - The authors show that the forecast performance of GARCH models improves after accounting for potential structural changes. Importantly, we observe a significant drop in the volatility persistence of emission prices. In addition, the effects of positive and negative shocks on carbon market volatility increase when breaks are taken into account. Overall, the findings reveal that when structural breaks are ignored in the emission price risk, the volatility persistence is overestimated and the news impact is underestimated. Originality/value - The authors are the first to examine how the conditional variance of carbon emission allowance prices reacts to structural breaks.

Suggested Citation

  • Anupam Dutta & Naji Jalkh & Elie Bouri & Probal Dutta, 2019. "Assessing the risk of the European Union carbon allowance market," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 16(1), pages 49-60, June.
    • Handle: RePEc:eme:ijmfpp:ijmf-01-2019-0045
    DOI: 10.1108/IJMF-01-2019-0045
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    Cited by:

    1. Jonathan Berrisch & Sven Pappert & Florian Ziel & Antonia Arsova, 2022. "Modeling Volatility and Dependence of European Carbon and Energy Prices," Papers 2208.14311, arXiv.org, revised Feb 2023.
    2. Vlad-Cosmin Bulai & Alexandra Horobet & Oana Cristina Popovici & Lucian Belascu & Sofia Adriana Dumitrescu, 2021. "A VaR-Based Methodology for Assessing Carbon Price Risk across European Union Economic Sectors," Energies, MDPI, vol. 14(24), pages 1-21, December.

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