Modeling Volatility and Dependence of European Carbon and Energy Prices

08/30/2022

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by   Jonathan Berrisch, et al.

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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.