Advanced Topics: Time-to-Maturity and Modeling the Volatility of Carbon Prices

  • Julien Chevallier


This chapter examines the maturity effects of the CO2 futures contracts traded on the European Climate Exchange, in conjunction with the CO2 spot prices traded on the BlueNext market. It investigates the ‘Samuelson hypothesis’ that the volatility of futures price changes increases as a contract’s delivery date nears. While the literature on commodities usually finds strong empirical support of this hypothesis (in agricultural markets for instance), this chapter provides a weak support for the CO2 market. Volatility is found to increase near the expiration of the contract only with realized volatility measures (constructed as the sum of intraday squared returns). The net cost-of-carry and GARCH modeling approaches fail to detect such time-to-maturity effects. This chapter illustrates the superiority of realized volatility in carbon pricing, as the data is observed and modeled at the highest possible frequency. An Appendix completes this chapter by dealing with statistical tests to detect instability in the volatility of carbon prices.


Price Volatility Future Price GARCH Modeling Future Contract Spot Price 
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Copyright information

© Springer Science+Business Media B.V. 2012

Authors and Affiliations

  1. 1.CGEMP/LEDa Department of EconomicsUniversity Paris DauphineParisFrance

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