Modeling volatility and dependence of European carbon and energy prices

Jonathan Berrisch, Sven Pappert, Florian Ziel and Antonia Arsova

Finance Research Letters, 2023, vol. 52, issue C

Abstract: We study the prices of European Emission Allowances (EUA), whereby we analyze their uncertainty and dependencies on related energy prices (natural gas, coal, and oil). We propose a probabilistic multivariate conditional time series model with a VECM-Copula-GARCH structure which exploits key characteristics of the data. Data are normalized with respect to inflation and carbon emissions to allow for proper cross-series evaluation. The forecasting performance is evaluated in an extensive rolling-window forecasting study, covering eight years out-of-sample. We discuss our findings for both levels- and log-transformed data, focusing on time-varying correlations, and in view of the Russian invasion of Ukraine.

Keywords: Carbon prices, Conditional volatility, Copula, Emission allowances, Energy markets, Forecasting, Multivariate modeling, Time series (search for similar items in EconPapers)
JEL-codes: C21 C32 C58 G17 Q41 Q5 Q59 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322006791

DOI: 10.1016/j.frl.2022.103503

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