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On the Stochastic Properties of Carbon Futures Prices

Author

Listed:
  • Julien Chevallier

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

  • Benoît Sévi

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

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).

Suggested Citation

  • Julien Chevallier & Benoît Sévi, 2014. "On the Stochastic Properties of Carbon Futures Prices," Post-Print hal-01474249, HAL.
  • Handle: RePEc:hal:journl:hal-01474249
    DOI: 10.1007/s10640-013-9695-2
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    Cited by:

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    2. Zied Ftiti & Aviral Tiwari & Amél Belanès & Khaled Guesmi, 2014. "Tests of Financial Market Contagion: Evolutionary Cospectral Analysis V.S. Wavelet Analysis," Working Papers 2014-577, Department of Research, Ipag Business School.
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    5. Pan, Di & Zhang, Chen & Zhu, Dandan & Ji, Yuanpu & Cao, Wei, 2022. "A novel method of detecting carbon asset price jump characteristics based on significant information shocks," Finance Research Letters, Elsevier, vol. 47(PA).
    6. Zhang, Lixia & Luo, Qin & Guo, Xiaozhu & Umar, Muhammad, 2022. "Medium-term and long-term volatility forecasts for EUA futures with country-specific economic policy uncertainty indices," Resources Policy, Elsevier, vol. 77(C).
    7. Yuanfeng Hu & Yixiang Tian & Luping Zhang, 2023. "Green Bond Pricing and Optimization Based on Carbon Emission Trading and Subsidies: From the Perspective of Externalities," Sustainability, MDPI, vol. 15(10), pages 1-20, May.
    8. repec:ipg:wpaper:2014-535 is not listed on IDEAS
    9. Hu, Yuanfeng & Tian, Yixiang, 2024. "The role of green reputation, carbon trading and government intervention in determining the green bond pricing: An externality perspective," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 46-62.
    10. Mason, Charles F. & Wilmot, Neil A., 2024. "On climate fat tails and politics," Resources Policy, Elsevier, vol. 92(C).
    11. Julien Chevallier & Stéphane Goutte, 2014. "The goodness-of-fit of the fuel-switching price using the mean-reverting Lévy jump process," Working Papers 2014-285, Department of Research, Ipag Business School.
    12. Mason, Charles F. & A. Wilmot, Neil, 2014. "Jump processes in natural gas markets," Energy Economics, Elsevier, vol. 46(S1), pages 69-79.
    13. Bai, Yiyi & Okullo, Samuel J., 2023. "Drivers and pass-through of the EU ETS price: Evidence from the power sector," Energy Economics, Elsevier, vol. 123(C).
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    15. repec:ipg:wpaper:2014-494 is not listed on IDEAS
    16. Balcılar, Mehmet & Demirer, Rıza & Hammoudeh, Shawkat & Nguyen, Duc Khuong, 2016. "Risk spillovers across the energy and carbon markets and hedging strategies for carbon risk," Energy Economics, Elsevier, vol. 54(C), pages 159-172.
    17. Coleman, Andrew, 2018. "Forest-based carbon sequestration, and the role of forward, futures, and carbon-lending markets: A comparative institutions approach," Journal of Forest Economics, Elsevier, vol. 33(C), pages 95-104.
    18. Julien Chevallier & Stéphane Goutte, 2017. "Estimation of Lévy-driven Ornstein–Uhlenbeck processes: application to modeling of $$\hbox {CO}_2$$ CO 2 and fuel-switching," Annals of Operations Research, Springer, vol. 255(1), pages 169-197, August.
    19. Dahlen, Niklas & Fehrenkötter, Rieke & Schreiter, Maximilian, 2024. "The new bond on the block — Designing a carbon-linked bond for sustainable investment projects," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 316-325.
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    22. Balietti, Anca Claudia, 2016. "Trader types and volatility of emission allowance prices. Evidence from EU ETS Phase I," Energy Policy, Elsevier, vol. 98(C), pages 607-620.
    23. repec:ipg:wpaper:2014-523 is not listed on IDEAS

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    More about this item

    Keywords

    Activity signature function; C14; C32; Carbon price; Economic Policy; Economics/Management Science; general; Environmental Economics; Environmental Law/Policy/Ecojustice; Environmental Management; G1; Q4; Stochastic modeling;
    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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