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Convenience Yields and Risk Premiums in the EU‐ETS—Evidence from the Kyoto Commitment Period
Author(s) -
Trück Stefan,
Weron Rafał
Publication year - 2016
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21780
Subject(s) - normal backwardation , futures contract , spot contract , volatility (finance) , economics , convenience yield , futures market , financial crisis , risk premium , hedge , monetary economics , variance risk premium , empirical evidence , financial economics , implied volatility , volatility risk premium , ecology , biology , macroeconomics , philosophy , epistemology
We examine convenience yields and risk premiums in the EU‐wide CO 2 emissions trading scheme (EU‐ETS) during the first Kyoto commitment period (2008–2012). We find that the market has changed from initial backwardation to contango with significantly negative convenience yields in futures contracts. We further examine the impact of interest rate levels in the Eurozone, the increasing level of surplus allowances and banking, as well as returns, variance, or skewness in the EU‐ETS spot market. Our findings suggest that the drop in risk‐free rates during and after the financial crisis has impacted on the deviation from the cost‐of‐carry relationship for emission allowances (EUA) futures contracts. Our results also illustrate a negative relationship between convenience yields and the increasing level of inventory during the first Kyoto commitment period, providing an explanation for the high negative convenience yields. Finally, we find that market participants are willing to pay an additional risk premium in the futures market for a hedge against increased volatility in EUA prices. Overall, our results contribute to the literature on the determinants and empirical properties of convenience yields and risk premiums for this relatively new class of assets. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 36:587–611, 2016