Valuation of Carbon Emission Allowances and Related Derivatives Under a Closed Trading Phase

57 Pages Posted: 19 Jun 2017

See all articles by Mingyu Fang

Mingyu Fang

University of Waterloo - Department of Statistics and Actuarial Science; Society of Actuaries

Ken Seng Tan

University of Waterloo

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Date Written: May 31, 2017

Abstract

This paper provides a complete-market valuation framework for emission allowances and related derivatives. In particular we present a structural model by assuming an emission rate with time-homogeneous parameters, where closed-form expressions are derived for allowances, allowance futures, and option prices. In addition, we also discuss the completeness of the allowance market and the source of incompleteness as supported by empirical evidence. While identifying limitations of the models, we present in detail their applications under information incompleteness, with a focus on deriving implied emission values from actual market data. Finally, the model is implemented using real world allowance data, based on which a comparative analysis is undertaken.

Keywords: Climate change, Carbon dioxide, Valuation of carbon emission allowances, Market completeness, Market and information incompleteness, Analytical Analysis, Numerical Analysis.

JEL Classification: C15, G13

Suggested Citation

Fang, Mingyu and Tan, Ken Seng and Wirjanto, Tony S., Valuation of Carbon Emission Allowances and Related Derivatives Under a Closed Trading Phase (May 31, 2017). Available at SSRN: https://ssrn.com/abstract=2988701 or http://dx.doi.org/10.2139/ssrn.2988701

Mingyu Fang (Contact Author)

University of Waterloo - Department of Statistics and Actuarial Science

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada

Society of Actuaries ( email )

475 North Martingale
Suite 800
Schaumburg, IL 60173
United States

Ken Seng Tan

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
57
Abstract Views
588
rank
442,154
PlumX Metrics