Risk-neutral models for emission allowance prices and option valuation

Rene A. Carmona, Juri Hinz

Research output: Contribution to journalArticle

37 Scopus citations

Abstract

The existence of mandatory emission trading schemes in Europe and the United States, and the increased liquidity of trading on futures contracts on CO2 emissions allowances, led naturally to the next step in the development of these markets: These futures contracts are now used as underliers for a vibrant derivative market. In this paper, we give a rigorous analysis of a simple risk-neutral reduced-form model for allowance futures prices, demonstrate its calibration to historical data, and show how to price European call options written on these contracts.

Original languageEnglish (US)
Pages (from-to)1453-1468
Number of pages16
JournalManagement Science
Volume57
Issue number8
DOIs
StatePublished - Aug 1 2011

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research

Keywords

  • Cap-and-trade schemes
  • Emission derivatives
  • Emissions markets
  • Environmental finance

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