Price and Volatility Prediction in the EU ETS Market

Abstract

In this thesis we examine return and volatility predictability of continuous futures contracts within the European Union Emissions Trading System (EU ETS). The market has been active for nine years and we examine whether it is more mature now compared to a few years ago when most existing research was carried out. We find that autoregressive terms are now significantly weaker compared to during the first phase of the ETS, which is seen as a sign that the market has become more efficient. As heteroskedasticity is observed, GARCH models are used to model and predict volatility. To predict returns, we find that using exogenous inputs, in the form of electricity, coal, Brent oil and gas prices, yield better results than using autoregressive terms of the emission allowance data. Based on the results, we suggest that exogenous variables may be used to predict the returns of carbon futures.