Dynamic Hedge Ratio Estimations in the European Union emissions Offset Credit Market

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Author(s)
Fan, John Hua
Akimov, Alexandr
Roca, Eduardo
Year published
2013
Metadata
Show full item recordAbstract
Following the introduction of the European Union Emissions Trading Scheme in 2005, the size of the carbon market has been growing at a tremendous rate. To meet the emissions reduction targets, the regulated parties can choose to participate in the allowance-based market by purchasing the spot allowances. Commencing in 2008, the regulated parties are also allowed to purchase the offset credits to meet their allowance limit. Given the risky nature of the offset credits, this paper evaluates the hedging performance of dynamic hedge ratios for the carbon offset credit (certified emissions reduction) market in the EU-ETS. To the ...
View more >Following the introduction of the European Union Emissions Trading Scheme in 2005, the size of the carbon market has been growing at a tremendous rate. To meet the emissions reduction targets, the regulated parties can choose to participate in the allowance-based market by purchasing the spot allowances. Commencing in 2008, the regulated parties are also allowed to purchase the offset credits to meet their allowance limit. Given the risky nature of the offset credits, this paper evaluates the hedging performance of dynamic hedge ratios for the carbon offset credit (certified emissions reduction) market in the EU-ETS. To the best of our knowledge, this paper is the first attempt to evaluate the hedging performance of dynamic and constant hedge ratios in the carbon offset credit market. Based on the variance reduction and utility improvement measurements, the findings generally support the use of static hedge ratios over the more sophisticated, dynamic hedge ratios.
View less >
View more >Following the introduction of the European Union Emissions Trading Scheme in 2005, the size of the carbon market has been growing at a tremendous rate. To meet the emissions reduction targets, the regulated parties can choose to participate in the allowance-based market by purchasing the spot allowances. Commencing in 2008, the regulated parties are also allowed to purchase the offset credits to meet their allowance limit. Given the risky nature of the offset credits, this paper evaluates the hedging performance of dynamic hedge ratios for the carbon offset credit (certified emissions reduction) market in the EU-ETS. To the best of our knowledge, this paper is the first attempt to evaluate the hedging performance of dynamic and constant hedge ratios in the carbon offset credit market. Based on the variance reduction and utility improvement measurements, the findings generally support the use of static hedge ratios over the more sophisticated, dynamic hedge ratios.
View less >
Journal Title
Journal of Cleaner Production
Volume
42
Copyright Statement
© 2013 Elsevier. This is the author-manuscript version of this paper. Reproduced in accordance with the copyright policy of the publisher. Please refer to the journal's website for access to the definitive, published version.
Subject
Environmental engineering
Manufacturing engineering
Finance
Built environment and design
Engineering