Leverage analysis of carbon market price fluctuation in China

Abstract

Abstract China’s carbon market has become increasingly active in recent years, and thus it is of great significance to study the characteristics of the carbon allowance price fluctuation for the healthy and steady development of this market. As leverage is common in asset prices in general financial markets, this paper adopts the leverage stochastic volatility (SV-L) model to characterize the price volatility of the five pilot carbon markets in China. We first make a Bayesian inference for the SV model, then construct a Monte Carlo calculation process based on Gibbs sampling for empirical analysis, and finally compare the SV-L model with the normal stochastic volatility (SV–N) model. The results show that the carbon price fluctuations of the five pilot markets are quite different. Among them, Shenzhen, Guangdong, Shanghai, and Beijing have a “positive leverage effect”, and Hubei has an “anti-leverage effect”. Through comparative analysis, we find that the SV-L model is superior to the SV-N model in terms of the degree of data fitting and simulation ability. Finally, we offer suggestions on the development of China’s unified carbon market.