Variance risk-premia in CO2 markets
Economic Modelling, 2013, vol. 31, issue C, 598-605
This paper proposes a new methodology to measure the volatility of CO2 assets computed as the difference between model-free implied volatility (from option prices) and model-free realized volatility (from high-frequency intraday data), coined as ‘variance risk-premia’ (Carr and Wu, 2009; Bollerslev et al., 2009; Trolle and Schwartz, 2010), during 2008–2011. We find that variance risk-premia are equal to a daily sample average of 0.79 for European Union Allowances and 0.18 for Certified Emissions Reductions. In the spirit of the CAPM, we show that the beta can only explain a small portion, and that macro risk factors specific to CO2 markets and energy volatilities can improve this result. Hence, there exists a systematic variance risk factor in CO2 markets that asks for a highly risk premium. Further analysis shows that variance risk-premia are time-varying, and can be used as strong predictors for forecasting CO2 returns.
Keywords: Variance risk-premia; CO2 market; Model-free implied volatility; Realized volatility; Forecasting; EUA; CER; EU ETS; CDM; Energy volatilities (search for similar items in EconPapers)
JEL-codes: C5 G1 Q4 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:31:y:2013:i:c:p:598-605
Access Statistics for this article
Economic Modelling is currently edited by S. Hall and P. Pauly
More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().