Options introduction and volatility in the EU ETS
Chevallier, Julien; Le Pen, Yannick; Sévi, Benoît (2011), Options introduction and volatility in the EU ETS, Resource and Energy Economics, 33, 4, p. 855-880. http://dx.doi.org/10.1016/j.reseneeco.2011.07.002
TypeArticle accepté pour publication ou publié
External document linkhttp://hal.archives-ouvertes.fr/hal-00419339/fr/
Journal nameResource and Energy Economics
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Abstract (EN)To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identification of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had no effect on the volatility in the EU ETS. These finding are robust to other likely influences linked to energy and commodity markets.
Subjects / KeywordsEU ETS; Option prices; Volatility; GARCH; Rolling Estimation; Endogenous Structural Break Detection
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