Carbon price volatility: Evidence from EU ETS

Zhen-Hua Feng, Le-Le Zou and Yi-Ming Wei

No 4, CEEP-BIT Working Papers from Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology

Abstract: This paper examines carbon price volatility using data from the European Union Emission Trading Scheme from a nonlinear dynamics point of view. First, we use a random walk model, including serial correlation and variance ratio tests, to determine whether carbon price history information is fully reflected in current carbon price. The empirical research results show that carbon price is not a random walk: the price history information is not fully reflected in current carbon price. Second, use R/S, modified R/S and ARFIMA to analyze the memory of carbon price history. For the period April 2005 to December 2008, the modified Hurst index of the carbon price is 0.4859 and the d value of ARFIMA is -0.1191, indicating short-term memory of the carbon price. Third, we use chaos theory to analyze the influence of the carbon market internal mechanism on carbon price, i.e., the market's positive and negative feedback mechanism and the heterogeneous environment. Chaos theory proves that the correlation dimension of carbon price increases. The maximal Lyapunov exponent is positive and large. There is no obvious complex endogenous phenomenon of nonlinear dynamics the carbon price fluctuation. The carbon market is mildly chaotic, showing both market and fractal market characteristics. Price fluctuation is not only influenced by the internal market mechanism, but is also impacted by the heterogeneous environment. Finally, we provide suggestions for regulation and development of carbon market.

Keywords: Carbon price; EU ETS; nonlinear dynamics; feedback mechanism; heterogeneous environment (search for similar items in EconPapers)
JEL-codes: Q56 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2009-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Carbon price volatility: Evidence from EU ETS (2011)
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