Detecting Instability in the Volatility of Carbon Prices

Julien Chevallier

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Abstract: This article investigates the presence of outliers in the volatility of carbon prices. We compute three different measures of volatility for European Union Allowances, based on daily data (EGARCH model), option prices (implied volatility), and intraday data (realized volatility). Based on the methodology developed by Zeileis et al. (2003) and Zeileis (2006), we detect instability in the volatility of carbon prices based on two kinds of tests: retrospective tests (OLS-/Recursive-based CUSUM processes, F-statistics, and residual sum of squares), and forward-looking tests (by monitoring structural changes recursively or with moving estimates). We show evidence of strong shifts mainly for the EGARCH and IV models during the time period. Overall, we suggest that yearly compliance events, and growing uncertainties in post-Kyoto international agreements, may explain the instability in the volatility of carbon prices.

Date: 2011
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Published in Energy Economics, 2011, 33 (1), pp.99-110. ⟨10.1016/j.eneco.2010.09.006⟩

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Journal Article: Detecting instability in the volatility of carbon prices (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00991957

DOI: 10.1016/j.eneco.2010.09.006

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