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.
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.
|Full text:||(AM) Accepted Manuscript|
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
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|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/|
|Date accepted:||25 March 2016|
|Date deposited:||29 March 2016|
|Date of first online publication:||01 April 2016|
|Date first made open access:||01 April 2017|
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