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Nonlinearities in carbon spot-futures price relationships during Phase II of the EU ETS

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Listed:
  • Mohamed El Hedi Arouri

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Fredj Jawadi
  • Duc Khuong Nguyen

Abstract

This paper uses the Vector Autoregressive (VAR) model and the Switching Transition Regression-Exponential GARCH models (STR-EGARCH) to examine the dynamic relationships between the EU Emission Allowances (EUA) spot and futures prices during Phase II. Compared to the majority of previous studies, our empirical approach allows us to simultaneously capture asymmetry and nonlinearity effects in both return and volatility processes of carbon allowance prices. Our main findings show that carbon spot and futures returns are asymmetrically and nonlinearly linked, suggesting the usefulness of nonlinear models in pricing and forecasting carbon allowances prices.
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Suggested Citation

  • Mohamed El Hedi Arouri & Fredj Jawadi & Duc Khuong Nguyen, 2012. "Nonlinearities in carbon spot-futures price relationships during Phase II of the EU ETS," Post-Print hal-01410551, HAL.
    • Handle: RePEc:hal:journl:hal-01410551
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    References listed on IDEAS

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    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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