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Options introduction and volatility in the EU ETS

Julien Chevallier, Yannick Le Pen () and Benoît Sévi ()
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Yannick Le Pen: LEDA-CGEMP - Centre de Géopolitique de l’Energie et des Matières Premières - LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes
Benoît Sévi: LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes, GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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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 E. 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.

Date: 2011
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Published in Resource and Energy Economics, 2011, 33 (4), pp.855-880. ⟨10.1016/j.reseneeco.2011.07.002⟩

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Journal Article: Options introduction and volatility in the EU ETS (2011) Downloads
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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:hal:journl:hal-00991848

DOI: 10.1016/j.reseneeco.2011.07.002

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