@article {Uhrig-Homburg73, author = {Marliese Uhrig-Homburg and Michael Wagner}, title = {Futures Price Dynamics of CO2 Emission Allowances: An Empirical Analysis of the Trial Period }, volume = {17}, number = {2}, pages = {73--88}, year = {2009}, doi = {10.3905/JOD.2009.17.2.073}, publisher = {Institutional Investor Journals Umbrella}, abstract = {The introduction of markets for trading emission rights for CO2 and other pollutants has created an important new class of financial instruments. The EU has moved ahead rapidly in this area, and greenhouse gas emission allowances (EUAs) have been trading since 2005. Futures and option contracts on EUAs have also been introduced, which naturally brings the question of how such derivatives should be priced. Models for pricing forwards and futures are well-established for an underlying that is storable, but they are often violated in real world markets, with the discrepancy typically referred to as a {\textquotedblleft}convenience yield.{\textquotedblright} In this article, the authors examine the pricing of EUA futures during the early trading periods. After an initial period that featured rather noisy pricing, the cost-of-carry model is largely found to hold when the EUAs for the relevant year have been issued, but the convenience yield is not consistent over time. Tests of causality show that it runs both ways, from futures to spot and from spot to futures. This is an interesting first look at a new market that can be expected to develop rapidly in the future.TOPICS: Options, futures and forward contracts, developed}, issn = {1074-1240}, URL = {https://jod.pm-research.com/content/17/2/73}, eprint = {https://jod.pm-research.com/content/17/2/73.full.pdf}, journal = {The Journal of Derivatives} }