Essays on Emissions Trading Markets

This dissertation is a collection of three economics essays on different aspects of carbon emission trading markets. The first essay analyzes the dynamic optimal emission control strategies of two nations. With a potential to become the largest buyer under the Kyoto Protocol, the US is assumed to be a monopsony, whereas with a large number of tradable permits on hand Russia is assumed to be a monopoly. Optimal costs of emission control programs are estimated for both the countries under four different market scenarios: non-cooperative no trade, US monopsony, Russia monopoly, and cooperative trading. The US monopsony scenario is found to be the most Pareto cost efficient. The Pareto efficient outcome, however, would require the US to make side payments to Russia, which will even out the differences in the cost savings from cooperative behavior. The second essay analyzes the price dynamics of the Chicago Climate Exchange (CCX), a voluntary emissions trading market. By examining the volatility in market returns using AR-GARCH and Markov switching models, the study associates the market price fluctuations with two different political regimes of the US government. Further, the study also identifies a high volatility in the returns few months before the market collapse. Three possible regulatory and market-based forces are identified as probable causes of market volatility and its ultimate collapse. Organizers of other voluntary markets in the US and worldwide may closely watch for these regime switching forces in order to overcome emission market crashes. The third essay compares excess skewness and kurtosis in carbon prices between CCX and EU ETS (European Union Emission Trading Scheme) Phase I and II markets, by examining the tail behavior when market expectations exceed the threshold level. Dynamic extreme value theory is used to find out the mean price exceedence of the threshold levels and estimate the risk loss. The calculated risk measures suggest that CCX and EU ETS Phase I are extremely immature markets for a risk investor, whereas EU ETS Phase II is a more stable market that could develop as a mature carbon market in future years.

Risk premiumin the global creditMarkets: 2006-2012

¿What have we learnt from the 2006-2012 crisis, including events such as the subprime crisis, the bankruptcy of Lehman Brothers or the European sovereign debt crisis, among others? It is usually assumed that in firms that have a CDS quotation, this CDS is the key factor in establishing the credit premiumrisk for a new financial asset. Thus, the CDS is a key element for any investor in taking relative value opportunities across a firm’s capital structure. In the first chapter we study the most relevant aspects of the microstructure of the CDS market in terms of pricing, to have a clear idea of how this market works. We consider that such an analysis is a necessary point for establishing a solid base for the rest of the chapters in order to carry out the different empirical studies we perform. In its document “Basel III: A global regulatory framework for more resilient banks and banking systems”, Basel sets the requirement of a capital charge for credit valuation adjustment (CVA) risk in the trading book and its methodology for the computation for the capital requirement. This regulatory requirement has added extra pressure for in-depth knowledge of the CDS market and this motivates the analysis performed in this thesis. The problem arises in estimating of the credit risk premium for those counterparties without a directly quoted CDS in the market. How can we estimate the credit spread for an issuer without CDS? In addition to this, given the high volatility period in the credit market in the last few years and, in particular, after the default of Lehman Brothers on 15 September 2008, we observe the presence of big outliers in the distribution of credit spread in the different combinations of rating, industry and region. After an exhaustive analysis of the results from the different models studied, we have reached the following conclusions. It is clear that hierarchical regression models fit the data much better than those of non-hierarchical regression. Furthermore,we generally prefer the median model (50%-quantile regression) to the mean model (standard OLS regression) due to its robustness when assigning the price to a new credit asset without spread,minimizing the “inversion problem”. Finally, an additional fundamental reason to prefer the median model is the typical "right skewness" distribution of CDS spreads...

Toward an understanding of the atmospheric forcing uncertainties in the Mediterranean Sea

The thesis has extensively investigated for the first time the statistical distributions of atmospheric surface variables and heat fluxes for the Mediterranean Sea. After retrieving a 30-year atmospheric analysis dataset, we have captured the spatial patterns of the probability distribution of the relevant atmospheric variables for ocean atmospheric forcing: wind components (U,V), wind amplitude, air temperature (T2M), dewpoint temperature (D2M) and mean sea-level pressure (MSL-P). The study reveals that a two-parameter PDF is not a good fit for T2M, D2M, MSL-P and wind components (U,V) and a three parameter skew-normal PDF is better suited. Such distribution captures properly the data asymmetric tails (skewness). After removing the large seasonal cycle, we show the quality of the fit and the geographic structure of the PDF parameters. It is found that the PDF parameters vary between different regions, in particular the shape (connected to the asymmetric tails) and the scale (connected to the spread of the distribution) parameters cluster around two or more values, probably connected to the different dynamics that produces the surface atmospheric fields in the Mediterranean basin. Moreover, using the atmospheric variables, we have computed the air-sea heat fluxes for a 20-years period and estimated the net heat budget over the Mediterranean Sea. Interestingly, the higher resolution analysis dataset provides a negative heat budget of –3 W/m2 which is within the acceptable range for the Mediterranean Sea heat budget closure. The lower resolution atmospheric reanalysis dataset(ERA5) does not satisfy the heat budget closure problem pointing out that a minimal resolution of the atmospheric forcing is crucial for the Mediterranean Sea dynamics. The PDF framework developed in this thesis will be the basis for a future ensemble forecasting system that will use the statistical distributions to create perturbations of the atmospheric ocean forcing.