Carbon option price forecasting based on modified fractional Brownian motion optimized by GARCH model in carbon emission trading

Zhibin Liu and Shan Huang

The North American Journal of Economics and Finance, 2021, vol. 55, issue C

Abstract: With the rapid growth of carbon trading, the development of carbon financial derivatives such as carbon options has become inevitable. This paper established a model based on GARCH and fractional Brownian motion (FBM), hoping to provide reference for China's upcoming carbon option trading through carbon option price forecasting research. The fractal characteristic of carbon option prices indicates that it is reasonable to use FBM to predict option prices. The GARCH model can make up for the lack of fixed FBM volatility. In this paper, the daily closing prices of EUA option contracts on the European Energy Exchange are selected as samples for price prediction. The GARCH model was used to determine the return volatility, and then the FBM was used to calculate the forecast price for the next 60 days. The results showed that the predicted price can better fit the actual price. This paper further compares the price prediction results of this model with the other three models through line graphs and error evaluation indicators such as MAPE, MAE and MSE. It is confirmed that the prediction results of the model in this paper is the closest to the actual price.

Keywords: Carbon option price forecasting; Fractional Brownian motion (FBM); GARCH (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:55:y:2021:i:c:s1062940820301959

DOI: 10.1016/j.najef.2020.101307

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