Dynamic factor analysis of carbon allowances prices: From classic Arbitrage Pricing Theory to Switching Regimes

Marius-Cristian Frunza (), Dominique Guegan () and Antonin Lassoudière ()
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Marius-Cristian Frunza: Centre d'Economie de la Sorbonne et Sagacarbon - Caisse des Dépôts, https://centredeconomiesorbonne.cnrs.fr
Dominique Guegan: Centre d'Economie de la Sorbonne - Paris School of Economics, https://cv.archives-ouvertes.fr/dominique-guegan
Antonin Lassoudière: Sagacarbon - Caisse des dépôts

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: The aim of this paper is to identify the fundamental factors that drive the allowances market and to built an APT-like model in order to provide accurate forecasts for CO2. We show that historic dependency patterns emphasis energy, natural gas, oil, coal and equity indexes as major factors driving the carbon allowances prices. There is strong evidence that model residuals are heavily tailed and asymmetric, thereby generalized hyperbolic distribution provides with the best fit results. Introducing dynamics inside the parameters of the APT model via a Hidden Markov Chain Model outperforms the results obtained with a static approach. Empirical results clearly indicate that this model could be used for price forecasting, that it is effective in and out of sample producing consisten results in allowances futures price prediction

Keywords: Carbon; EUA; energy; Arbitrage Pricing Theory; switching regimes; hidden Markov Chain model; forecast (search for similar items in EconPapers)
Pages: 21 pages
Date: 2010-06
New Economics Papers: this item is included in nep-ene, nep-env, nep-for and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://mse.univ-paris1.fr/pub/mse/CES2010/10062.pdf (application/pdf)

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Working Paper: Dynamic factor analysis of carbon allowances prices: From classic Arbitrage Pricing Theory to Switching Regimes (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:10062

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