Carbon prices forecasting in quantiles

Ren, X., Duan, K., Tao, L., Shi, Y. and Yan, C. (2022) Carbon prices forecasting in quantiles. Energy Economics, 108, 105862. (doi: 10.1016/j.eneco.2022.105862)

Abstract

This paper proposes two new methods (the Quantile Group LASSO and the Quantile Group SCAD models) to evaluate the predictability of a large group of factors on carbon futures returns. The most powerful predictors are selected through the dimension-reduction mechanism of the two models, while potential differences of the statistically significant predictors for different quantiles of carbon returns are carefully considered. First, we find that the proposed models outperform a series of competing ones with respect to prediction accuracy. Second, impacts of the selected predictors over the carbon price distribution are estimated through a quantile approach, which outperforms the mean shrinkage model in our case with data featured by a non-normal distribution. Specifically, the Brent spot price, the crude oil closing stock in the UK, and the growth of natural gas production in the UK are found to impact carbon futures returns only in extreme conditions with a strong asymmetric feature. Importantly, our estimators remain robust against the extreme event caused by the Covid-19. Our findings reveal that the identification of appropriate carbon return predictors and their impacts hinge on the carbon market conditions, and should be of interest to various stakeholders.

• Item Type: Articles
• Additional Information: The article is supported by the Key Program of the National Natural Science Foundation of China (Grant No. 72131011).
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Shi, Dr Yukun and Yan, Dr Cheng
• Authors: Ren, X., Duan, K., Tao, L., Shi, Y., and Yan, C.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Energy Economics
• Publisher: Elsevier
• ISSN: 0140-9883
• ISSN (Online): 1873-6181
• Published Online: 05 February 2022
• Copyright Holders: Copyright © 2022 Elsevier B.V.
• First Published: First published in Energy Economics 108: 105862
• Publisher Policy: Reproduced in accordance with the publisher copyright policy