Risk-neutral models for emission allowance prices and option valuation

Rene A. Carmona; Juri Hinz

doi:10.1287/mnsc.1110.1358

Risk-neutral models for emission allowance prices and option valuation

Rene A. Carmona, Juri Hinz

Research output: Contribution to journal › Article › peer-review

57 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 language	English (US)
Pages (from-to)	1453-1468
Number of pages	16
Journal	Management Science
Volume	57
Issue number	8
DOIs	https://doi.org/10.1287/mnsc.1110.1358
State	Published - Aug 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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10.1287/mnsc.1110.1358

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Risk-neutral models for emission allowance prices and option valuation

Abstract

All Science Journal Classification (ASJC) codes

Keywords

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