2011
DOI: 10.1287/mnsc.1110.1358
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Risk-Neutral Models for Emission Allowance Prices and Option Valuation

Abstract: The existence of mandatory emission trading schemes in Europe and the United States, and the increased liquidity of trading on futures contracts on CO 2 emissions allowances, led naturally to the next step in the development of these markets: These futures contracts are now used as underliers for a vibrant derivative market. In this paper, we give a rigorous analysis of a simple risk-neutral reduced-form model for allowance futures prices, demonstrate its calibration to historical data, and show how to price E… Show more

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Cited by 82 publications
(64 citation statements)
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“…8 The measure P refers to the historical probability. We refer to Carmona and Hinz (2011) for a discussion and evaluation of the risk neutral pollution dynamics under an equivalent measure Q. 9 It is worth noting that Equation (5) corresponds to the equilibrium permit price described in theorem 1 of Fehr and Hinz (2006).…”
Section: Resultsmentioning
confidence: 99%
“…8 The measure P refers to the historical probability. We refer to Carmona and Hinz (2011) for a discussion and evaluation of the risk neutral pollution dynamics under an equivalent measure Q. 9 It is worth noting that Equation (5) corresponds to the equilibrium permit price described in theorem 1 of Fehr and Hinz (2006).…”
Section: Resultsmentioning
confidence: 99%
“…Grüll and Kiesel [5] used the formula to analyse the emission permit price drop during the first compliance period. Carmona and Hinz [2] and Hinz [8] propose a reduced-form model which is particular feasible for the calibration of EUA futures and options as it directly models the underlying price process. Both Paolella and Taschini [12] and Benz and Trück [1] provide an econometric analysis for the short-term spot price behavior and the heteroscedastic dynamics of the price returns.…”
Section: Introductionmentioning
confidence: 99%
“…Both Paolella and Taschini [12] and Benz and Trück [1] provide an econometric analysis for the short-term spot price behavior and the heteroscedastic dynamics of the price returns. For the option pricing, Carmona and Hinz [2] derive a option pricing formula from their reduced-form model for a single trading period. They also discuss the extension of the formula to two trading periods.…”
Section: Introductionmentioning
confidence: 99%
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