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Options introduction and volatility in the EU ETS

Julien Chevallier, Yannick Le Pen () and Benoît Sévi ()

Working Papers from Chaire Economie du climat

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)
Pages: 34 pages
Date: 2011-06
New Economics Papers: this item is included in nep-ene, nep-env, nep-eur and nep-rmg
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http://www.chaireeconomieduclimat.org/RePEc/cec/wp ... lier_Le-Pen_Sevi.pdf First version, 2011 (application/pdf)

Related works:
Journal Article: Options introduction and volatility in the EU ETS (2011) Downloads
Working Paper: Options introduction and volatility in the EU ETS (2009) Downloads
Working Paper: Options introduction and volatility in the EU ETS (2009) Downloads
Working Paper: Options Introduction and Volatility in the EU ETS (2009) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:cec:wpaper:1107

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