Estimating risk for the carbon market via extreme value theory: An empirical analysis of the EU ETS

Zhen-Hua Feng, Yi-Ming Wei and Kai Wang

Applied Energy, 2012, vol. 99, issue C, 97-108

Abstract: With the rapid growth of the carbon market, carbon price fluctuations are increasingly important for market participants. Carbon market risk directly affects the investor confidence and emission reduction results. In the present study, extreme value theory (EVT) is used to analyze risk exposure for carbon price and to measure the Value at Risk (VaR) for the carbon market. GARCH models are applied to establish a model of price volatility for the spot market and the futures market and to calculate dynamic VaR. Traditional VaR and VaR based on EVT are also compared. The results show that the downside risk is higher than the upside risk for the carbon market. Upside and downside risks are higher in the first phase (June 2005–December 2007) than in the second phase (February 2008–December 2009) for both the spot and futures markets. Upside and downside risks are similar for the spot and futures markets during the same phase. The results also show that the EVT VaR is more effective than the traditional method, which can reduce the risks for market participants. Dynamic VaR based on GARCH and EVT can effectively measure the EU ETS market risk.

Keywords: EU ETS; VaR; GARCH; EVT; Carbon price; Risk measurement (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0306261912000761
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Estimating risk for the carbon market via extreme value theory: An empirical analysis of the EU ETS (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:appene:v:99:y:2012:i:c:p:97-108

Ordering information: This journal article can be ordered from
http://www.elsevier.com/wps/find/journaldescription.cws_home/405891/bibliographic
http://www.elsevier. ... 405891/bibliographic

DOI: 10.1016/j.apenergy.2012.01.070

Access Statistics for this article

Applied Energy is currently edited by J. Yan

More articles in Applied Energy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().