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On the Stochastic Properties of Carbon Futures Prices

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  • Julien Chevallier
  • Benoît Sévi

Abstract

Pricing carbon is a central concern in environmental economics, due to the worldwide importance of emissions trading schemes to regulate pollution. This paper documents the presence of small and large jumps in the stochastic process of the CO $$_2$$ 2 futures price. The large jumps have a discrete origin, i.e. they can arise from various demand factors or institutional decisions on the tradable permits market. Contrary to the existing literature, we show that the stochastic process of carbon futures prices does not contain a continuous component (Brownian motion). The results are derived by using high-frequency data in the activity signature function framework (Todorov and Tauchen in J Econom 154:125–138, 2010 ; Todorov and Tauchen in J Bus Econ Stat 29:356–371, 2011 ). The implication is that the carbon futures price should be modeled as an appropriately sampled, centered Lévy or Poisson process. The pure-jump behavior of the carbon price might be explained by the lower volume of trades on this allowance market (compared to other highly liquid financial markets). Copyright Springer Science+Business Media Dordrecht 2014

Suggested Citation

  • Julien Chevallier & Benoît Sévi, 2014. "On the Stochastic Properties of Carbon Futures Prices," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(1), pages 127-153, May.
    • Handle: RePEc:kap:enreec:v:58:y:2014:i:1:p:127-153
    DOI: 10.1007/s10640-013-9695-2
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    6. Zied Ftiti & Aviral Tiwari & Amél Belanès, 2014. "Tests of Financial Market Contagion: Evolutionary Cospectral Analysis V.S. Wavelet Analysis," Working Papers 2014-62, Department of Research, Ipag Business School.
    7. Mason, Charles F. & A. Wilmot, Neil, 2014. "Jump processes in natural gas markets," Energy Economics, Elsevier, vol. 46(S1), pages 69-79.
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    More about this item

    Keywords

    Carbon price; Stochastic modeling; Activity signature function; C14; C32; G1; Q4;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G1 - Financial Economics - - General Financial Markets
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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