The forecasting accuracy of implied volatility from ECX carbon options

Citation

Viteva S, Veld-Merkoulova Y & Campbell K (2014) The forecasting accuracy of implied volatility from ECX carbon options. Energy Economics, 45, pp. 475-484. https://doi.org/10.1016/j.eneco.2014.08.005

Abstract
This study analyzes the forecasting accuracy of the implied volatility of options on futures contracts for the delivery of CO2emission allowances (carbon options) traded on the European Climate Exchange. We demonstrate that option implied volatility is highly informative about the variance of returns realized over the remaining life of the options. It is also directionally accurate in predicting future volatility changes. However, we also find that implied volatility of carbon options is biased, especially for periods of time which do not coincide with the remaining life of the option. This suggests that the market has yet to fully mature.

Keywords
Carbon options; Implied volatility; Volatility forecasting; EU Emissions Trading Scheme

Journal
Energy Economics: Volume 45