Modelling Daily CER Price Volatility in European Energy Exchange: Evidence from MSARIMA-EGARCH Model

Abstract

This study tries to model time varying volatility of daily Certified Emission Reduction (CER) prices traded in European Energy Exchange by employing MSARIMA and EGARCH models. CER prices have further been sub-divided into various time-periods with the objective of comparing the price movement and volatility in each sub-period between two successive COP (Conferences of the Parties). Apart from volatility modelling, the study also tries to forecasts daily CER price using MSARIMA-EGARCH models. The study reveals that CER price exhibits non-stationarity, seasonality and time-varying volatility. MSARIMA-EGARCH model confirms that past shocks to the variance are symmetric in nature and shocks to CER price volatility take some time before it dies away. In-sample forecasting performances reveal that MSARIMA slightly outperform ARIMA-EGARCH model. The study also indicates that the periods between Copenhagen Summit (COP 15) and Cancun Summit (COP 16) and post Durban summit, CER price do not exhibit any time varying volatility.