Equilibrium Price Dynamics of Emission Permits

Steffen Hitzemann, Marliese Uhrig-Homburg

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

This article presents a stochastic equilibrium model for environmental markets that allows us to study the characteristic properties of emission permit prices induced by the design of today's cap-and-trade systems. We characterize emission permits as highly nonlinear contingent claims on economy-wide emissions and reveal their hybrid nature between investment and consumption assets. Our model makes predictions about the dynamics and volatility structure of emission permit prices, the forward price curve, and the implications for option pricing in this market. Empirical evidence from existing emissions markets shows that the model explains the stylized facts of emission permit prices and related derivatives.

Original languageEnglish (US)
Pages (from-to)1653-1678
Number of pages26
JournalJournal of Financial and Quantitative Analysis
Volume53
Issue number4
DOIs
StatePublished - Aug 1 2018

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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