Energy Derivatives' Market Dynamics

35 Pages Posted: 16 Apr 2012

See all articles by Don Bredin

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance

Eamonn Ciagain


Cal B. Muckley

University College Dublin

Date Written: April 16, 2012


In this paper, we examine the EU Emissions Trading Scheme options and futures markets’ dynamics during the period 2005 to 2011. We study observations on returns, volatilities and volumes on derivative instruments. In addition, we examine spot/future correlations, term structures and option implied volatility smiles and surfaces. We seek to ascertain whether the behavior of the EU ETS derivatives’ markets can be compared to that of commodity markets, specifically the developed West Texas Intermediate (WTI) crude oil derivatives’ market. Our results indicate that the EU Emissions Trading Scheme derivatives’ markets have matured markedly since the start of Phase 2 of the Scheme, with rising volumes and declining return volatilities. Spot/future correlations, term structures and option volatility smiles and surfaces exhibit comparable behavior, over time, albeit with certain discrepancies, with that found in the developed WTI crude oil derivatives’ market. These results are valuable both for traders of EU allowances and for those policy makers seeking to improve the design of the EU Emissions Trading Scheme.

Keywords: EU ETS, Options, Futures, Market Dynamics, Returns, Volatility, Volume, CO2

Suggested Citation

Bredin, Don and Ciagain, Eamonn and Muckley, Cal B., Energy Derivatives' Market Dynamics (April 16, 2012). Available at SSRN: or

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance ( email )

School of Business
Blackrock, Co. Dublin, 4


Eamonn Ciagain

UBS AG ( email )

Bahnhofstrasse 45
Zurich, 8001

Cal B. Muckley (Contact Author)

University College Dublin ( email )

Blackrock, Co. Dublin
+353-1-716-8091 (Phone)

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