Empirical Evidence on Time-Varying Hedging Effectiveness of Emissions Allowances under Departures from the Cost-of-Carry Theory
Under departures from the cost-of-carry theory, traded spot prices and conditional volatility disturbed from futures market have significant impacts on futures price of emissions allowances, and then we propose time-varying hedge ratios and hedging effectiveness estimation using ECM-GARCH model. Our...
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| Format: | Article |
| Language: | English |
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Wiley
2013-01-01
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| Series: | Discrete Dynamics in Nature and Society |
| Online Access: | http://dx.doi.org/10.1155/2013/905329 |
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| author | Kai Chang |
| author_facet | Kai Chang |
| author_sort | Kai Chang |
| collection | DOAJ |
| description | Under departures from the cost-of-carry theory, traded spot prices and conditional volatility disturbed from futures market have significant impacts on futures price of emissions allowances, and then we propose time-varying hedge ratios and hedging effectiveness estimation using ECM-GARCH model. Our empirical results show that conditional variance, conditional covariance, and their correlation between between spot and futures prices exhibit time-varying trends. Conditional volatility of spot prices, conditional volatility disturbed from futures market, and conditional correlation of market noises implied from spot and futures markets have significant effects on time-varying hedge ratios and hedging effectiveness. In the immature emissions allowances market, market participants optimize portfolio sizes between spot and futures assets using historical market information and then achieve higher risk reduction of assets portfolio revenues; accordingly, we can obtain better hedging effectiveness through time-varying hedge ratios with departures from the cost-of-carry theory. |
| format | Article |
| id | doaj-art-d591bd7c3ac249a397ca6cdda5789f8f |
| institution | Kabale University |
| issn | 1026-0226 1607-887X |
| language | English |
| publishDate | 2013-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Discrete Dynamics in Nature and Society |
| spelling | doaj-art-d591bd7c3ac249a397ca6cdda5789f8f2025-02-03T05:44:58ZengWileyDiscrete Dynamics in Nature and Society1026-02261607-887X2013-01-01201310.1155/2013/905329905329Empirical Evidence on Time-Varying Hedging Effectiveness of Emissions Allowances under Departures from the Cost-of-Carry TheoryKai Chang0School of Finance, Zhejiang University of Finance & Economics, High Education Park in Xiasha District, Hangzhou, Zhejiang 310038, ChinaUnder departures from the cost-of-carry theory, traded spot prices and conditional volatility disturbed from futures market have significant impacts on futures price of emissions allowances, and then we propose time-varying hedge ratios and hedging effectiveness estimation using ECM-GARCH model. Our empirical results show that conditional variance, conditional covariance, and their correlation between between spot and futures prices exhibit time-varying trends. Conditional volatility of spot prices, conditional volatility disturbed from futures market, and conditional correlation of market noises implied from spot and futures markets have significant effects on time-varying hedge ratios and hedging effectiveness. In the immature emissions allowances market, market participants optimize portfolio sizes between spot and futures assets using historical market information and then achieve higher risk reduction of assets portfolio revenues; accordingly, we can obtain better hedging effectiveness through time-varying hedge ratios with departures from the cost-of-carry theory.http://dx.doi.org/10.1155/2013/905329 |
| spellingShingle | Kai Chang Empirical Evidence on Time-Varying Hedging Effectiveness of Emissions Allowances under Departures from the Cost-of-Carry Theory Discrete Dynamics in Nature and Society |
| title | Empirical Evidence on Time-Varying Hedging Effectiveness of Emissions Allowances under Departures from the Cost-of-Carry Theory |
| title_full | Empirical Evidence on Time-Varying Hedging Effectiveness of Emissions Allowances under Departures from the Cost-of-Carry Theory |
| title_fullStr | Empirical Evidence on Time-Varying Hedging Effectiveness of Emissions Allowances under Departures from the Cost-of-Carry Theory |
| title_full_unstemmed | Empirical Evidence on Time-Varying Hedging Effectiveness of Emissions Allowances under Departures from the Cost-of-Carry Theory |
| title_short | Empirical Evidence on Time-Varying Hedging Effectiveness of Emissions Allowances under Departures from the Cost-of-Carry Theory |
| title_sort | empirical evidence on time varying hedging effectiveness of emissions allowances under departures from the cost of carry theory |
| url | http://dx.doi.org/10.1155/2013/905329 |
| work_keys_str_mv | AT kaichang empiricalevidenceontimevaryinghedgingeffectivenessofemissionsallowancesunderdeparturesfromthecostofcarrytheory |