Options introduction and volatility in the EU ETS

Julien Chevallier, Yannick Le Pen and Benoît Sévi

Resource and Energy Economics, 2011, vol. 33, issue 4, 855-880

Abstract: To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EUA futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identification of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had the effect of decreasing the level of volatility in the EU ETS while impacting its dynamics. These findings are fairly robust to other likely influences linked to energy and commodity markets.

Keywords: EU ETS; Option prices; Volatility; GARCH; Rolling estimation; Endogenous structural break detection (search for similar items in EconPapers)
JEL-codes: G13 G18 Q57 Q58 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0928765511000455
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Options introduction and volatility in the EU ETS (2011)
Working Paper: Options introduction and volatility in the EU ETS (2011)
Working Paper: Options introduction and volatility in the EU ETS (2009)
Working Paper: Options introduction and volatility in the EU ETS (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:resene:v:33:y:2011:i:4:p:855-880

DOI: 10.1016/j.reseneeco.2011.07.002

Access Statistics for this article

Resource and Energy Economics is currently edited by J. F. Shogren and S. Smulders

More articles in Resource and Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().