Mean reversion of stochastic convenience yields for CO2 emissions allowances: Empirical evidence from the EU ETS

Abstract

This paper examines the mean-reversion property and volatility features of stochastic convenience yields for CO2 emissions allowances by using ADF, ECM-GARCH and ECM-TGARCH models. Empirical results show that the convenience yields for CO2 emissions allowances exhibit time-varying trends when different maturities are considered, and that convenience yields exhibit a linear mean-reverting process. We also find that the volatility of convenience yields exhibits a mean-reversion process and asymmetric leverage effect using ECM-GARCH (1,1) and ECM-TARCH (1,1) models. Unfavorable market information has a higher impact on this volatility than favorable market information, and unfavorable market information has a lower effect on the long-term volatility of convenience yields.