Modeling of carbon credit prices using regime switching approach

In this study, we analyze the price dynamics of carbon certificates that are traded under the European Union's Emissions Trading System (EU-ETS). With the aim of investigating the joint relations among carbon, electricity, and fuel prices, we model historical prices using several methods and in...

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Bibliographic Details
Published in:Journal of renewable and sustainable energy 2018-05, Vol.10 (3)
Main Authors: Çanakoğlu, Ethem, Adıyeke, Esra, Ağralı, Semra
Format: Article
Language:English
Subjects:
Autoregressive models
Carbon
Econometrics
Economic models
Electricity pricing
Emissions control
Markov chains
Modelling
Performance tests
Prices
Regression analysis
Switching
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Summary:In this study, we analyze the price dynamics of carbon certificates that are traded under the European Union's Emissions Trading System (EU-ETS). With the aim of investigating the joint relations among carbon, electricity, and fuel prices, we model historical prices using several methods and incorporating structural changes, such as econometric time series, regime switching, and multivariate vector autoregression models. We compare the results of the structural model with the results of traditional Markov switching and autoregressive models with breaks and present performance analysis based on the mean average percentage error, root mean squared error, and coefficient of determination. According to these performance tests, models with regimes outperform the approaches where breaks are defined using ex ante dummy variables. Moreover, we conclude that among regime switching models, univariate models are better than multivariate counterparts for modeling carbon price series for the analysis of both in-sample and out-of-samples.
ISSN:1941-7012
1941-7012
DOI:10.1063/1.4996653