A0465
Title: Modelling spot and option-on-futures prices of the EU carbon allowance
Authors: Rogemar Mamon - University of Western Ontario (Canada) [presenting]
Abstract: The behavior of the spot price of carbon emission allowance is investigated in the European Union Emissions Trading Scheme (EU ETS). Motivated by the volatility clustering phenomenon, a regime-switching mechanism is embedded into four stochastic models governed by a hidden Markov chain, which enables time-dependent parametrization. The pricing of European-style futures call options is examined under the proposed modelling setups. The models are assessed by comparing the pricing errors using Bloomberg's call option data on EUA futures. The proposed regime-switching geometric Brownian motion is deemed the best-fitting model among the developed alternatives.
