Please use this identifier to cite or link to this item: http://hdl.handle.net/2381/37164
Title: Optimal hedging in carbon emission markets using Markov regime switching models
Authors: Shi, Yukun
Philip, D.
First Published: 2016
Publisher: Elsevier
Citation: Journal of International Financial Markets, Institutions & Money (Accepted, In Press)
Abstract: This paper proposes a Markov regime switching framework for modeling carbon emission (CO2) allowances that combines a regime switching behavior and disequilibrium adjustments in the mean process, along with a state-dependent dynamic volatility process. We find that all regime switching based hedging strategies significantly outperform single regime hedging strategies (both in-sample and out-of-sample), with the newly proposed framework providing the greatest variance reduction and the best hedging performance. Our results indicate that risk managers using state-dependent hedge ratios to manage portfolio risks in carbon emission markets will achieve superior hedging returns.
DOI Link: 10.1016/j.intfin.2016.03.003
ISSN: 1042-4431
Links: http://www.sciencedirect.com/science/article/pii/S1042443116300142
TBA
http://hdl.handle.net/2381/37164
Embargo on file until: 1-Jan-10000
Version: Post-print
Status: Peer-reviewed
Type: Journal Article
Rights: Copyright © 2016 Published by Elsevier B.V. This manuscript version is made available after the end of the embargo period under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/ 
Description: The file associated with this record is under a 36-month embargo from publication in accordance with the publisher's self-archiving policy. The full text may be available through the publisher links provided above.
Appears in Collections:Published Articles, School of Management

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