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

Mohamed Arouri (), Fredj Jawadi () and Duc Khuong Nguyen

Economic Modelling, 2012, vol. 29, issue 3, 884-892

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.

Keywords: Carbon pricing; CO2 allowance market; Spot and futures prices; Nonlinear models (search for similar items in EconPapers)
JEL-codes: C2 Q50 (search for similar items in EconPapers)
Date: 2012
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Working Paper: Nonlinearities in carbon spot-futures price relationships during Phase II of the EU ETS (2012)
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DOI: 10.1016/j.econmod.2011.11.003

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