Modeling Volatility and Dependence of European Carbon and Energy Prices

Jonathan Berrisch, Sven Pappert, Florian Ziel and Antonia Arsova

Abstract: We study the prices of European Emission Allowances (EUA), whereby we analyze their uncertainty and dependencies on related energy prices (natural gas, coal, and oil). We propose a probabilistic multivariate conditional time series model with a VECM-Copula-GARCH structure which exploits key characteristics of the data. Data are normalized with respect to inflation and carbon emissions to allow for proper cross-series evaluation. The forecasting performance is evaluated in an extensive rolling-window forecasting study, covering eight years out-of-sample. We discuss our findings for both levels- and log-transformed data, focusing on time-varying correlations, and in view of the Russian invasion of Ukraine.

Date: 2022-08, Revised 2023-02
New Economics Papers: this item is included in nep-cis, nep-ecm, nep-ene, nep-env, nep-for, nep-rmg and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2208.14311

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