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Volatility in CO2 EUAs returns: a FIGARCH approach

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  • José Manuel Madeira Belbute

    (CEFAGE)

Abstract

Resumo/Abstract: This paper models volatility in CO2 EUAs emission returns using a FIGARCH approach. Our findings overwhelmingly suggest that conditional variance in CO2 emissions allowance returns is stationary and mean reverting autocorrelations decaying at a hyperbolic rate. Hence, a shock to forecast of future conditional variance will be temporary but it will last longer. Our results have important policy implications, as the knowledge of the stochastic properties of the conditional variance is of particular relevance for decisions on investment in abatement activities, for the design of arbitrage strategies to take advantage of momentary opportunities in energy markets. Moreover, our results also suggest the importance of accounting for the interactions of volatility in the EUAs CO2 emissions market with energy sectors, the economy, and climate, both in terms of modeling and forecasting.

Suggested Citation

  • José Manuel Madeira Belbute, 2019. "Volatility in CO2 EUAs returns: a FIGARCH approach," CEFAGE-UE Working Papers 2019_02, University of Evora, CEFAGE-UE (Portugal).
    • Handle: RePEc:cfe:wpcefa:2019_02
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    More about this item

    Keywords

    CO2 emission prices; Volatility; FIGARCH.;
    All these keywords.

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