Carbon portfolio management

Abstract

The aim of the European Union's Emissions Trading Scheme (EU ETS) is that by 2020, emissions from sectors covered by the EU ETS will be 21% lower than in 2005. In addition to large CO 2 emitting companies covered by the scheme, other participants have entered the market with a view of using emission allowances for the diversification of their investment portfolios. The performance of this asset as a stand alone investment and its portfolio diversification implications will be investigated in this paper. Our results indicate that the market views Phases 1, 2, and 3 European Union allowance futures as unattractive as stand alone investments. In a portfolio context, in Phase 1, once the short-selling option is added, there are considerable portfolio benefits. However, our results indicate that these benefits only existed briefly during the pilot stage of the EU ETS. There is no evidence to suggest portfolio diversification benefits exist for Phase 2 or the early stages of Phase 3.

Impact of the number of bonds on bond portfolio exposure to interest rate risk

“…To avoid facing the challenges that might come with the selection of an optimal portfolio, this paper exclusively deals with bond portfolios that we have constructed using data presented in Table 1. Investigating the problem related to portfolio selection, Afonin, Bredin, Cuthbertson, Muckley, and Nitzsche (2018) have analysed the modern portfolio theory introduced by Markowitz ( 1952 ). They have come up with the conclusion that the optimal portfolio is not fully diversified as it pretends to be and that it is exposed to ex‐post risk.…”

Carbon Credit Futures as an Emerging Asset Hedging, Diversification and Downside Risks

“…There are also some studies exploring the hedging potential of energy and carbon futures for mitigating carbon price risk (see among others Balcilar et al, 2016;Philip and Shi, 2016;Wen et al, 2017;Chai and Zhou, 2018;Lee and Yoon, 2020). However, relatively very few empirical works analyse the performance of carbon futures as a standalone investment (Zhang et al, 2017;Afonin et al, 2018). Therefore, our paper fills this gap by exploring the performance of global carbon futures not only for green stocks but also for conventional stock portfolios.…”

“…3 Carbon futures are used by financial market participants for hedging to facilitate risk mitigation and transfer (Narayan and Sharma, 2015;Schultz and Swieringa, 2014). Besides, with the involvement of institutional investors including hedge funds, pension funds and carbon funds, carbon markets have received considerable interest from market players who want to extend their investment opportunities, even though they do not have any emission reduction obligations (Afonin et al, 2018). As pointed out by Dutta (2018), financial institutions constitute a weighty group of investors in the European emission market that make use of the EUAs as an effective tool for portfolio diversification and as a part of socially responsible investing strategy.…”

A new risk measurement method for China's carbon market

“…Greenhouse gas (GHGs) caused by global warming and extreme climate emissions increase pose a threat to the human society sustainable development (Wang et al, 2014). As a financial innovation to cope with climate change, carbon finance markets develop steadily under the "Kyoto Protocol" (Afonin, Bredin, Cuthbertson, Muckley, & Nitzsche, 2018). The economy of China has developed at high rate for a long time.…”