An Empirical Investigation on the Risk-Return Relationship of Carbon Future Market

This paper examines the risk-return relationship for the carbon future market during Phases I, II and III of the European Union Emission Trading Scheme （EU ETS）. The risk factors derived from the newly developed LSW model, are embedded into a GARCH framework. This new specification is compared with...

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Bibliographic Details
Published in:Journal of systems science and complexity 2016-08, Vol.29 (4), p.1057-1070
Main Authors: Li, Ziran, Qiao, Han, Song, Nan, Zu, Lei
Format: Article
Language:English
Subjects:
Complex Systems
Control
Mathematics
Mathematics and Statistics
Mathematics of Computing
Operations Research/Decision Theory
Statistics
Systems Theory
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Summary:This paper examines the risk-return relationship for the carbon future market during Phases I, II and III of the European Union Emission Trading Scheme （EU ETS）. The risk factors derived from the newly developed LSW model, are embedded into a GARCH framework. This new specification is compared with several GARCH-M type models analyzing the risk-return relationship in the carbon market. The results show that the new specification consistently achieves a good fit and possesses superior explanatory power for the European Union Allowance （EUA） data. Some policy suggestions regarding market efficiency are also provided.
ISSN:1009-6124
1559-7067
DOI:10.1007/s11424-015-4141-x