Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/103791
Authors: 
Benschopa, Thijs
López Cabreraa, Brenda
Year of Publication: 
2014
Series/Report no.: 
SFB 649 Discussion Paper 2014-050
Abstract: 
We analyse the short-term spot price of European Union Allowances (EUAs), which is of particular importance in the transition of energy markets and for the development of new risk management strategies. Due to the characteristics of the price process, such as volatility persistence, breaks in the volatility process and heavy-tailed distributions, we investigate the use of Markov switching GARCH (MS-GARCH) models on daily spot market data from the second trading period of the EU ETS. Emphasis is given to short-term forecasting of prices and volatility. We find that MS-GARCH models distinguish well between two states and that the volatility processes in the states are clearly different. This finding can be explained by the EU ETS design. Our results support the use of MS-GARCH models for risk management, especially because their forecasting ability is better than other Markov switching or simple GARCH models.
Subjects: 
CO2 Emission Allowances
CO2 Emission Trading
Spot Price Modelling
Markov Switching GARCH Models
Volatility Forecasting
JEL: 
C53
G17
Q49
Q53
Q59
Document Type: 
Working Paper

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