Jessica Fouilloux

Market Efficiency in the European Carbon Markets

In this paper, we study the relationship between futures and spot prices in the European carbon markets from the cost-of-carry hypothesis. The aim is to investigate the extent of efficiency market. The three main European markets (BlueNext, EEX and ECX) are analyzed during Phase II, covering the period from March 13, 2009 to January, 17, 2012. Futures contracts are found to be cointegrated with spot prices and interest rates for several maturities in the three CO2 markets. Results are similar when structural breaks are taken into account. According to individual and joint tests, the cost-of-carry model is rejected for all maturities and CO2 markets, implying that neither contract is priced according to the cost-of-carry model. The absence of the cost-of-carry relationship can be interpreted as an indicator of market inefficiency and may bring arbitrage opportunities in the CO2 market.

Term Structure of Interest Rates and Expected Consumption Volatility: Empirical Test of Term Premiums

We test two forms of consumption-based asset pricing model on American bond market data. The first is the standard C-CAPM, the other one is derived from Abel (1999) who refers to an external habit. The term premium embedded in the term structure of interest rate is linked with the conditional variance of consumption growth and is variable through time. Our empirical test confirms that hypothesis. When modeling consumption using an AR-GARCH process, the ex ante out-of-sample value of the conditional variance is shown superior to other conditional measures. Considering both univariate and multivariate frameworks, variable term premiums are positively linked to variable consumption growth expectations. It supports the expectations hypothesis of term structure and the standard consumption-based asset pricing model. However, a significant constant appears in the empirical test which is not present in the standard consumption models, but can be related to the subjective discount factor of the representative agent. It leads to question the commonly assumed hypothesis of a constant subjective time preference and suggests a decreasing term structure of the agent psychological price of time.