Forecasting carbon futures volatility using GARCH models with energy volatilities

Suk Joon Byun and Hangjun Cho

Energy Economics, 2013, vol. 40, issue C, 207-221

Abstract: This article examines the volatility forecasting abilities of three approaches: GARCH-type model that uses carbon futures prices, an implied volatility from carbon options prices, and the k-nearest neighbor model. Based on the results, we document that GARCH-type models perform better than an implied volatility and the k-nearest neighbor model. This result suggests that carbon options have little information about carbon futures due to their low trading volume. We also investigate whether the volatilities of energy markets, i.e., Brent oil, coal, natural gas, and electricity, forecast following day's carbon futures volatility. According to the results, we suggest that Brent oil, coal, and electricity may be used to forecast the volatility of carbon futures.

Keywords: Carbon futures; GARCH; Implied volatility; Forecasting; Energy market (search for similar items in EconPapers)
JEL-codes: C22 G15 G17 Q47 Q54 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (92)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:40:y:2013:i:c:p:207-221

DOI: 10.1016/j.eneco.2013.06.017

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