Econometric Analysis of Carbon Markets

<p>1. Introduction to Emissions Trading</p><p>1.1 Review of International Climate Policies</p><p>1.1.1 From Rio to Durban</p><p>1.1.2 The Burgeoning EU CO2 Allowance Trading Market</p><p>1.2. Market Design Issues</p><p>1.2.1 Initial Allocation Rules</p><p>1.2.2 Equilibrium Permits Price</p><p>1.2.3 Spatial and Temporal Limits</p><p>1.2.4 Safety Valve</p><p>1.3. Key Features of the EU Emissions Trading Scheme</p><p>1.3.1 Scope and Allocation</p><p>1.3.2 Calendar</p><p>1.3.3 Penalties</p><p>1.3.4 Market Players</p><p>1.4 EUA Price Development</p><p>1.4.1 Structure and Main Features of EU ETS Contracts</p><p>1.4.2 Carbon Price</p><p>1.4.3 Descriptive Statistics</p><p> </p><p>2. CO2 Price Fundamentals</p><p>2.1 Institutional Decisions</p><p>2.1.1 Dummy Variables</p><p>2.1.2 Structural Breaks</p><p>2.2 Energy Prices</p><p>2.2.1 Literature Review</p><p>2.2.2 Oil, Natural Gas and Coal</p>2.2.3 Electricity Variables</p><p>2.3 Extreme Weather Events</p><p>2.3.1 Relationship Between Temperatures and Carbon Prices</p><p>2.3.2 Empirical Application</p><p>Appendix: BEKK MGARCH Modeling With CO2 and Energy Prices</p><p>Problems</p><p> </p><p>3. Link With The Macroeconomy</p><p>3.1 Stock and Bonds Markets</p><p>3.1.1 GARCH Modeling of the Carbon Price</p><p>3.1.2 Relationship With Stock and Bond Markets</p><p>3.2 Macroeconomic, Financial and Commodity Indicators</p><p>3.2.1 Extracting Factors Based On Principal Component Analysis</p><p>3.2.2 Factor-Augmented VAR Analysis Applied to EUAs</p><p>3.3 Industrial Production</p><p>3.3.1 Data</p><p>3.3.2 Nonlinearity Tests</p><p>3.3.3 Self-Exciting Threshold Autoregressive Models</p><p>3.3.4 Comparing Smooth Transition and Markov-Switching Autoregressive Models</p><p> </p><p>4. The Clean Development Mechanism</p><p>4.1 CERs Contracts and Price Development</p><p>4.2 Relationship With EU Emissions Allowances</p><p>4.2.1 VAR Analysis</p>4.2.2 Cointegration</p><p>4.3 CERs Price Drivers</p><p>4.3.1 Zivot-Andrews Structural Break Test</p><p>4.3.2 Regression Analysis</p><p>4.4 Arbitrage Strategies: The CER-EUA Spread</p><p>4.4.1 Why So Much Interest in this Spread?</p><p>4.4.2 Spread Drivers</p><p>Appendix: Markov Regime-Switching Modeling With EUAs And CERs</p><p>Problems</p><p> </p><p>5. Risk-Hedging Strategies And Portfolio Management</p><p>5.1 Risk Factors</p><p>5.1.1 Idiosyncratic Risks</p><p>5.1.2 Common Risk Factors</p><p>5.2 Risk Premia</p><p>5.2.1 Theory On Spot-Futures Relationships in Commodity Markets</p><p>5.2.2 Bessembinder and Lemmon’s (2002) Futures-Spot Structural Model</p><p>5.2.3 Empirical Application</p><p>5.3 Managing Carbon Price Risk In The Power Sector</p><p>5.3.1 Economic Rationale</p><p>5.3.2 UK Power Sector</p><p>5.3.3 Factors Influencing Fuel-Switching</p><p>5.3.4 Econometric Analysis</p><p>5.3.5 Empirical Results</p><p>5.3.6 Summary</p>5.4 Portfolio Management</p><p>5.4.1 Composition of the Portfolio</p><p>5.4.2 Mean-Variance Optimization and the Portfolio Frontier</p><p>Appendix: Implied Volatility From Option Pricing</p><p>Problems</p><p> </p><p>6. Advanced Topics: Time-To-Maturity and Modeling the Volatility of Carbon Prices</p><p>6.1 The Relationship Between Volatility and Time-To-Maturity in Carbon Prices</p><p>6.2 Background On the Samuelson Hypothesis</p><p>6.3 Data</p><p>6.3.1 Daily Frequency</p><p>6.3.2 Intraday Frequency</p><p>6.4 The ‘Net Carry Cost’ Approach</p><p>6.4.1 Computational Steps</p><p>6.4.2 Regression Analysis</p><p>6.4.3 Empirical Results</p><p>6.5 GARCH Modeling</p><p>6.5.1 GARCH Specification</p><p>6.5.2 Empirical Results</p><p>6.6 Realized Volatility Modeling</p><p>6.6.1 Computational Steps</p><p>6.6.2 Regression Analysis</p><p>6.6.3 Empirical Results</p><p>6.6.4 Sensitivity Tests</p><p>6.7 Summary</p><p>Appendix: Statistical Techniques To Detect Instability In The Volatility Of Carbon Prices</p><p> </p><p>Solutions</p><p> </p>Index