A1317
Title: Valuation of derivatives on carbon emission allowance
Authors: Rogemar Mamon - University of Western Ontario (Canada) [presenting]
Abstract: Spot prices of the EU ETS carbon emission allowance are investigated and modelled. A regime-switching mechanism is embedded in various stochastic models as inspired by the volatility clustering phenomenon. The recursive filtering technique is utilized in model calibration. The pricing of European-style futures call options is considered and assessed by comparing pricing errors using the EUA futures data compiled by Bloomberg. A particular hidden Markov model outperforms some benchmarks. The cost-of-carry relationship is also found to hold for both the interphase and intra-phase contracts.
