Cookies

We use cookies to ensure that we give you the best experience on our website. By continuing to browse this repository, you give consent for essential cookies to be used. You can read more about our Privacy and Cookie Policy.


Durham Research Online
You are in:

Optimal hedging in carbon emission markets using Markov regime switching models.

Philip, D. and Shi, Y. (2016) 'Optimal hedging in carbon emission markets using Markov regime switching models.', Journal of international financial markets, institutions and money., 43 . pp. 1-15.

Abstract

This paper proposes a Markov regime switching framework for modeling carbon emission (CO2) allowances that combines a regime switching behavior and disequilibrium adjustments in the mean process, along with a state-dependent dynamic volatility process. We find that all regime switching based hedging strategies significantly outperform single regime hedging strategies (both in-sample and out-of-sample), with the newly proposed framework providing the greatest variance reduction and the best hedging performance. Our results indicate that risk managers using state-dependent hedge ratios to manage portfolio risks in carbon emission markets will achieve superior hedging returns.

Item Type:Article
Full text:(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
Download PDF
(832Kb)
Status:Peer-reviewed
Publisher Web site:http://dx.doi.org/10.1016/j.intfin.2016.03.003
Publisher statement:© 2016 This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Record Created:29 Mar 2016 15:35
Last Modified:02 Apr 2017 00:38

Social bookmarking: del.icio.usConnoteaBibSonomyCiteULikeFacebookTwitterExport: EndNote, Zotero | BibTex
Look up in GoogleScholar | Find in a UK Library