Modeling EU allowances and oil market interdependence. Implications for portfolio management

Juan Reboredo

Energy Economics, 2013, vol. 36, issue C, 471-480

Abstract: This paper examines the dependence structure between European Union allowances (EUAs) and crude oil markets during the second commitment period of the European Union Emissions Trading Scheme and the implications for portfolio management. Using different copula models, our findings suggest positive average dependence and extreme symmetric independence that is consistent with interdependence and no contagion effects between the EUA and crude oil markets. The implication of this result for EUA-oil portfolios points to the existence of diversification benefits, hedging effectiveness, and value-at-risk reductions. The EUA market is therefore an attractive market for investors in terms of diversifying market risk and reducing downside risk in crude oil markets.

Keywords: CO2 emission allowances; Oil prices; Copulas; Portfolio management (search for similar items in EconPapers)
JEL-codes: C22 C58 G11 G15 G32 Q52 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (52)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:36:y:2013:i:c:p:471-480

DOI: 10.1016/j.eneco.2012.10.004

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