Volatility dynamics of EU ETS carbon allowance price and key allowance price determinants during phase III and phase IV

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Journal Title

Journal ISSN

Volume Title

School of Business | Master's thesis

Authors

Date

2024

Department

Taloustieteen laitos

Major/Subject

Mcode

Degree programme

Economics

Language

en

Pages

47+6

Series

Abstract

The thesis explores the dynamic relationship between the volatility of European Union Allowances and their key price determinants, including natural gas, coal, Brent oil, and the European market index. The study applies the DCC-GARCH(1,1) model on time series data from 2013 to 2024 covering EU ETS Phase III as whole and three first years of Phase IV. Results reveal that volatilities of all variables are partly dependent on past errors and volatilities, and variables seem to have jointly time-variant conditional correlation. Further analysis suggest that volatility has been more persistent and conditional correlation more time bound during the Phase III. Out of all variables gas show strongest conditional correlation with EUA while having overall very similar correlation development pattern with EUA and coal correlation pattern further implying similar underlying factors. Similar observations can be made between EUA and oil conditional correlation and EUA and market conditional correlation.

Description

Thesis advisor

Liski, Matti

Keywords

EU ETS, carbon allowance, fossil fuels, price volatility, DCC-GARCH

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Citation

Permanent link to this item

https://urn.fi/URN:NBN:fi:aalto-202406164321

Collections

[gradu] Kauppakorkeakoulu / BIZ