Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Das Wichtigste in Kürze Nontechnical SummarySince the introduction of the EU Emissions Trading System (EU ETS) in 2005, a new area of research has developed within the field of applied econometrics: Carbon Finance. Carbon Finance focuses on the analysis of the price formation of emission credits and allowances. As driving cost factor, prices of European Union Allowances (EUAs) influence operational business and long-term planning of EU ETS regulated firms. Therefore, the understanding of the EUA price dynamics are significant for practitioners, politicians and scientists. This paper contributes to the analysis of the relationship between the EUA price and its fundamentals, such as energy prices, indicators of the macroeconomic development and weather conditions in Europe. Based on a Markov regime-switching model, we estimate the nonlinear impact of these fundamentals on the EUA price. Further, the model allows to get insights into the development of the EUA price variation (volatility) over time.Breaks and changes in the data generating process that underlies the EUA price time series are a consequence of the design of the EU ETS. Emissions trading schemes are characterized by a fixed supply of allowances, while the demand is subject to various shocks and changes. A sudden decline of economic activities, for example, leads to decreasing emissions and hence to a decreasing demand of allowances. As a consequence, this situation increases uncertainty among market participants about the overall stringency of the scheme. The associated trading leads to higher levels of EUA price volatility and to a changing relation between the EUA price and its fundamentals. The empirical model identifies two different market states (regimes), that determine the EUA price dynamics. The data generating process switches several times between these two regimes during the period under consideration, i.e. January 2007 to August 2010. The first regime is characterized by no clear price trend, but high levels of EUA price variation. This state can also be interpreted as a market phase of disorientation. In contrast, the second regime describes a state where the EUA price exhibits a positive trend and where the variation in prices is on a lower level. The appearance of the first regime coincides with the economic recession in 2008 and 2009, a period characterized by decreasing aggregate emissions. The results show in addition, that energy prices are important EUA price determinants in both...

In this paper we model the adjustment process of European Union Allowance (EUA) prices to the releases of announcements at high-frequency controlling for intraday periodicity, volatility clustering and volatility persistence. We find that the high-frequency EUA price dynamics are very well captured by a fractionally integrated asymmetric power GARCH process. The decisions of the European Commission on second National Allocation Plans have a strong and immediate impact on EUA prices. On the other hand, our results suggest that EUA prices are only weakly connected to indicators about the future economic development as well as the current economic activity.

In this paper we model the adjustment process of European Union Allowance (EUA) prices to the releases of announcements at high-frequency controlling for intraday periodicity, volatility clustering and volatility persistence. We find that the high-frequency EUA price dynamics are very well captured by a fractionally integrated asymmetric power GARCH process. The decisions of the European Commission on second National Allocation Plans have a strong and immediate impact on EUA prices. On the other hand, our results suggest that EUA prices are only weakly connected to indicators about the future economic development as well as the current economic activity.

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Das Wichtigste in Kürze Nontechnical SummarySince the introduction of the EU Emissions Trading System (EU ETS) in 2005, a new area of research has developed within the field of applied econometrics: Carbon Finance. Carbon Finance focuses on the analysis of the price formation of emission credits and allowances. As driving cost factor, prices of European Union Allowances (EUAs) influence operational business and long-term planning of EU ETS regulated firms. Therefore, the understanding of the EUA price dynamics are significant for practitioners, politicians and scientists. This paper contributes to the analysis of the relationship between the EUA price and its fundamentals, such as energy prices, indicators of the macroeconomic development and weather conditions in Europe. Based on a Markov regime-switching model, we estimate the nonlinear impact of these fundamentals on the EUA price. Further, the model allows to get insights into the development of the EUA price variation (volatility) over time.Breaks and changes in the data generating process that underlies the EUA price time series are a consequence of the design of the EU ETS. Emissions trading schemes are characterized by a fixed supply of allowances, while the demand is subject to various shocks and changes. A sudden decline of economic activities, for example, leads to decreasing emissions and hence to a decreasing demand of allowances. As a consequence, this situation increases uncertainty among market participants about the overall stringency of the scheme. The associated trading leads to higher levels of EUA price volatility and to a changing relation between the EUA price and its fundamentals. The empirical model identifies two different market states (regimes), that determine the EUA price dynamics. The data generating process switches several times between these two regimes during the period under consideration, i.e. January 2007 to August 2010. The first regime is characterized by no clear price trend, but high levels of EUA price variation. This state can also be interpreted as a market phase of disorientation. In contrast, the second regime describes a state where the EUA price exhibits a positive trend and where the variation in prices is on a lower level. The appearance of the first regime coincides with the economic recession in 2008 and 2009, a period characterized by decreasing aggregate emissions. The results show in addition, that energy prices are important EUA price determinants in both...

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