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The optimal hedge for carbon market: an empirical analysis of EU ETS

Author

Listed:
  • Zhen-Hua Feng
  • Jie Yu
  • Bin Ouyang
  • Jie Guo
  • Zhong-Kui Li

Abstract

The paper uses non-expected utility model and hedging cost model to analyse carbon market. The results show that investors prefer to hold spot goods in carbon market in 2008-2012 than in 2005-2007. Hedging ratio is about 0.1 and 0.4 in 2005-2007 and 2008-2012 respectively for the international politics and negotiations leads to great volatility and complex changes in the carbon price, the optimal hedging ratio in carbon market is lower than general market. When disappointment aversion and risk aversion coefficient is extremely high or extremely low, deviations can be easily generated during carbon market judgment. The simulation indicates that returns sequences of future goods and spot goods in carbon market have no linear dependence. At present, future market cannot well provide hedging function for spot market.

Suggested Citation

  • Zhen-Hua Feng & Jie Yu & Bin Ouyang & Jie Guo & Zhong-Kui Li, 2016. "The optimal hedge for carbon market: an empirical analysis of EU ETS," International Journal of Global Energy Issues, Inderscience Enterprises Ltd, vol. 39(1/2), pages 129-140.
    • Handle: RePEc:ids:ijgeni:v:39:y:2016:i:1/2:p:129-140
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