Forecasting carbon futures volatility using GARCH models with energy volatilities

This article examines the volatility forecasting abilities of three approaches: GARCH-type model that uses carbon futures prices, an implied volatility from carbon options prices, and the k-nearest neighbor model. Based on the results, we document that GARCH-type models perform better than an implied volatility and the k-nearest neighbor model. This result suggests that carbon options have little information about carbon futures due to their low trading volume. We also investigate whether the volatilities of energy markets, i.e., Brent oil, coal, natural gas, and electricity, forecast following day's carbon futures volatility. According to the results, we suggest that Brent oil, coal, and electricity may be used to forecast the volatility of carbon futures. (C) 2013 Elsevier B.V. All rights reserved,
Publisher
ELSEVIER SCIENCE BV
Issue Date
2013-11
Language
ENG
Keywords

EMISSION ALLOWANCE PRICES; CONDITIONAL HETEROSKEDASTICITY; RETURN

Citation

ENERGY ECONOMICS, v.40, pp.207 - 221

ISSN
0140-9883
DOI
10.1016/j.eneco.2013.06.017
URI
http://hdl.handle.net/10203/187128
Appears in Collection
KGSF-Journal Papers(저널논문)
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