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Options introduction and volatility in the EU ETS

Julien Chevallier, Yannick Le Pen and Benoît Sévi ()

No 2009-33, EconomiX Working Papers from University of Paris Nanterre, EconomiX

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 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS 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 identi¯cation 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 no effect on the volatility in the EU ETS. These finding are 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: Q48 Q57 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-ene, nep-env and nep-rmg
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

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Related works:
Journal Article: Options introduction and volatility in the EU ETS (2011) Downloads
Working Paper: 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
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2009-33

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