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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: LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IUML - FR 3473 Institut universitaire Mer et Littoral - UM - Le Mans Université - UA - Université d'Angers - UN - Université de Nantes - ECN - École Centrale de Nantes - UBS - Université de Bretagne Sud - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes

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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 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 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 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)
Date: 2009-07-20
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00405709
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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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