Estimation and performance evaluation of optimal hedge ratios in the carbon market of the European Union Emissions Trading Scheme

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Fan, John Hua
Roca, Eduardo
Akimov, Alexandr
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2014
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Abstract

Following the introduction of the European Union Emissions Trading Scheme, CO2 emissions have become a tradable commodity. As a regulated party, emitters are forced to take into account the additional carbon emissions costs in their production costs structure. Given the high volatility of carbon price, the importance of price risk management becomes unquestioned. This study is the first attempt to calculate hedge ratios and to investigate their hedging effectiveness in the EU-ETS carbon market by applying conventional and recently developed models of estimation. These hedge ratios are then compared with those derived for other markets. In spite of the uniqueness and novelty of the carbon market, the results of the study are consistent with those found in other markets - that the hedge ratio is in the range of 0.5 to 1.0 and still best estimated by simple regression models.

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Australian Journal of Management

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39

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1

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© 2013 SAGE Publications. This is the author-manuscript version of the 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.

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Commerce, management, tourism and services

Investment and risk management

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