2006-11-14Buch DOI: 10.18452/4006
Convenience Yields for CO2 Emission Allowance Futures Contracts
In January 2005 the EU-wide CO2 emissions trading system (EU-ETS) has formallyentered into operation.Within the new trading system, the right to emit a particularamount of CO2 becomes a tradable commodity - called EU Allowances (EUAs) - and affected companies, traders and investors will face new strategic challenges. In thispaper we investigate the nature of convenience yields for CO2 emission allowancefutures. We conduct an empirical study on price behavior, volatility term structureand correlations in different CO2 EUA contracts. Our findings are that the markethas changed from initial backwardation to contango with significant convenienceyields in future contracts for the Kyoto commitment period starting in 2008. Ahigh fraction of the yields can be explained by the price level and volatility of thespot prices. We conclude that the yields can be interpreted as market expectationon the price risk of CO2 emissions allowance prices and the uncertainty of EUallocation plans for the Kyoto period.
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