Modeling and forecasting the volatility of carbon dioxide emission allowance prices : a review and comparison of modern volatility models

摘要

The launch of the markets for carbon dioxide emission allowances was guided by the aim to use the supposedlyefficient price formation mechanism of an organized exchange to optimally allocate a certain quantity ofemissions among potential polluters. While this introduction of a centralized trading arrangement should havehelped to achieve required emission reductions with a minimum of economic losses, from the viewpoint ofmarket participants it has raised concerns about appropriate risk management provisions to cope with thefluctuations of time-varying allowance prices. The present review provides an overview over state-of-the-artmodels for price volatility expanding the scope from relatively simple GARCH-type models to models with longtermdependence and regime switches including the relatively recent class of so-called multifractal models. Weprovide a comparative application of these models to carbon dioxide emission allowance prices from theEuropean Union Emission Trading Scheme and evaluate their performance with up-to-date model comparisontests based on out-of-sample forecasts of future volatility and value-at-risk.