Estimation and performance evaluation of optimal hedge ratios in the carbon market of the European Union Emissions Trading Scheme

Fan, John Hua; Roca, Eduardo; Akimov, Alexandr

doi:10.1177/0312896212468454

Cited by 26 publications

(11 citation statements)

References 30 publications

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“…The results presented in this paper generally indicate that a hedger (not limited to emitters) under the EU-ETS market environment who needs to hedge the price risk of its spot CER credit holding should use OLS over the dynamic hedge ratios, not only due its strong performance in variance reductions but also because of its simplicity and trading cost advantages over dynamic hedge ratios. The conclusion in this study is consistent with Fan et al (2012), in which it was also found that the simpler time-invariant hedge ratios outperform the more sophisticated time-varying hedge ratios in EUA market. This comes with no surprise as the CER and EUA over the period 2008-2010 have been highly correlated.…”

Section: Resultssupporting

confidence: 91%

Dynamic hedge ratio estimations in the European Union Emissions offset credit market

Fan¹,

Akimov²,

Roca³

2013

Journal of Cleaner Production

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Following the introduction of the European Union Emissions Trading Scheme in 2005, the size of the carbon market has been growing at a tremendous rate. To meet the emissions reduction targets, the regulated parties can choose to participate in the allowance-based market by purchasing the spot allowances. Commencing in 2008, the regulated parties are also allowed to purchase the offset credits to meet their allowance limit. Given the risky nature of the offset credits, this paper evaluates the hedging performance of dynamic hedge ratios for the carbon offset credit (certified emissions reduction) market in the EU-ETS. To the best of our knowledge, this paper is the first attempt to evaluate the hedging performance of dynamic and constant hedge ratios in the carbon offset credit market. Based on the variance reduction and utility improvement measurements, the findings generally support the use of static hedge ratios over the more sophisticated, dynamic hedge ratios.

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Section: Resultssupporting

confidence: 91%

Dynamic hedge ratio estimations in the European Union Emissions offset credit market

Fan¹,

Akimov²,

Roca³

2013

Journal of Cleaner Production

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“…[75,76] were concerned about the influence of carbon price risk on businesses' investment decisions and showed that, counter to expectations, these risks were considerable even for low-carbon technological options. Moreover, several authors evidenced the increased importance of carbon price risk management given the development of carbon markets [11][12][13]. Ref.…”

Section: Carbon Pricing Models-drivers and Impact On Economic Sectorsmentioning

confidence: 99%

“…The EU measures implemented to date are signals towards further expanding such a system. However, literature on the impact of carbon price risk on different sectors is rather scarce, although several studies indicate the need for carbon price risk management in the context of carbon market development [11][12][13]. It is rather surprising, in our opinion, that more research on the exposure of industries to carbon price risks has not yet been conducted.…”

Section: Introductionmentioning

confidence: 99%

A VaR-Based Methodology for Assessing Carbon Price Risk across European Union Economic Sectors

et al. 2021

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The latest European Union measures for combating climate adopted in the “Fit for 55 package” envisage the extension of the Emissions Trading System, the first “cap-and-trade” system in the world created for achieving climate targets, which limits the amount of greenhouse gas emissions by imposing a price on carbon. In this context, our study provides an integrated assessment of carbon price risk exposure of all economic sectors in the European Union Member States, thus supporting decision making in determining the energy transition risk. We propose a novel approach in assessing carbon risk exposure using the Value at Risk methodology to compute the carbon price under the EU ETS, based on historical price simulation for January–August 2021 and ARMA-GARCH models for the October 2012–August 2021 period. We further built a value erosion metric, which allowed us to establish each sector’s exposure to risk and to identify differences between Eastern and Western EU countries. We find that the refining sector appears to be highly vulnerable, whereas there is higher potential for large losses in the energy supply and chemical sectors in Eastern EU Member States, given a different pace of industry restructuring.

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“…The significance of carbon price risk management becomes significant with the development of carbon market. Fan [41] calculated hedge ratios and investigated the hedging effectiveness in the EU ETS. A time series analysis demonstrated that most speculative activities takes place in the front contract, however, the hedging demand concentrated in the second-to-deliver futures contract [42].…”

Section: Introductionmentioning

confidence: 99%

The tail dependence of the carbon markets: The implication of portfolio management

Zhang

2020

PLoS ONE

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Emission trading scheme (ETS), the most popular market-based instrument, is widely used to solve carbon emission problems in the world. With the development of carbon market, carbon asset has been a popular financial product to invest and the risk management becomes important for government, regulated enterprises and other investors. As carbon prices have tail characteristics, this paper explores the extremal risks between carbon markets in US, Europe and China using tail dependence correlation coefficients. The empirical analysis demonstrates the tail dependence structure between carbon markets in US. and Europe is the same sign, which indicates that it is unwise to hold these two carbon assets as a portfolio. Moreover, the co-movements between European Union Emission Trade Scheme (EU ETS) and China's carbon markets are partly significant, and the operation mechanisms in China should be improved. In addition, the tail dependence test among the carbon pilots in China shows diversity. Hubei carbon trading pilot, located in central China, has extremal dependence with all other selected pilots for its regulatory program operation. The findings give insight to the carbon market regulars to improve the operation mechanism and are also useful for the investors to manage their portfolios, policymakers to make practically applicable regulations, and relevant organizations to develop procedures.

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Estimation and performance evaluation of optimal hedge ratios in the carbon market of the European Union Emissions Trading Scheme

Cited by 26 publications

References 30 publications

Dynamic hedge ratio estimations in the European Union Emissions offset credit market

Dynamic hedge ratio estimations in the European Union Emissions offset credit market

A VaR-Based Methodology for Assessing Carbon Price Risk across European Union Economic Sectors

The tail dependence of the carbon markets: The implication of portfolio management

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