Constant vs. time-varying hedging effectiveness comparison for CO2 emissions allowances : the empirical evidence from the EU ETS
Part of : WSEAS transactions on business and economics ; Vol.10, No.3, 2013, pages 158-169
Issue:
Pages:
158-169
Author:
Abstract:
In recent years emissions allowances markets have become the most promising and quickly growing markets in the global commodities markets. In this paper, we estimate constant and time-varying optimal hedge ratios (OHR) and hedging effectiveness between spot and futures for CO2 emissions allowances by choosing the two-step EG, ECM, ECM-GARCH, and modified ECM-GARCH techniques. The empirical results show that price series between spot and futures contracts with different maturities exhibit significant cointegration relation, the error corrections and previous price movement significantly affect the optimal hedge ratios, and the hedging effectiveness (HE) by using constant hedge ratios from the ECM method has slightly better than HE from the two-step EG method. The optimal hedge ratios from the ECM-GARCH and modified ECM-GARCH method exhibit strongly time-varying trend, and then the hedging effectiveness by using time-varying hedge ratios from the ECM-GARCH and modified ECM-GARCH method are significantly better than HE by constant hedge ratios. The hedging effectiveness from the modified ECM-GARCH methods is highest among the hedging portfolio returns by using the above four methods.
Subject (LC):
Keywords:
emissions allowances, hedge ratio, hedging effectiveness, ECM-GARCH, modified ECM-GARCH
Notes:
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