Professor Dennis Philip dennis.philip@durham.ac.uk
Professor
Optimal hedging in carbon emission markets using Markov regime switching models
Philip, D.; Shi, Y.
Authors
Y. Shi
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.
Citation
Philip, D., & Shi, Y. (2016). Optimal hedging in carbon emission markets using Markov regime switching models. Journal of International Financial Markets, Institutions and Money, 43, 1-15. https://doi.org/10.1016/j.intfin.2016.03.003
Journal Article Type | Article |
---|---|
Acceptance Date | Mar 25, 2016 |
Online Publication Date | Apr 1, 2016 |
Publication Date | Jul 1, 2016 |
Deposit Date | Mar 29, 2016 |
Publicly Available Date | Apr 1, 2017 |
Journal | Journal of International Financial Markets, Institutions and Money |
Print ISSN | 1042-4431 |
Publisher | Elsevier |
Peer Reviewed | Peer Reviewed |
Volume | 43 |
Pages | 1-15 |
DOI | https://doi.org/10.1016/j.intfin.2016.03.003 |
Public URL | https://durham-repository.worktribe.com/output/1408350 |
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Publisher Licence URL
http://creativecommons.org/licenses/by-nc-nd/4.0/
Copyright 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/
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