Interpreting the mean reversion of international carbon futures price: Empirical evidence from the EU ETS

This paper introduced the mean reversion theory, GED-GARCH model and Value-at-Risk (VaR) approach to verify the existence of mean reversion in carbon market under the EU ETS (European Union Emissions Trading Scheme). Main empirical study results indicate that, whether before the compliance break in 2006 or after that, currently, neither carbon market price, return, volatility nor risk change moves along a mean reversion process; in other words, their movements take on some divergence, without the evidence for prediction. This for the most part results from the integrated influence of a number of complex factors such as political decisions, energy prices, stock market and extraordinary temperature, which brings about the low efficiency and overreaction in carbon market. The unpredictability of international carbon market exerts much influence on the returns of China's CDM projects and bank financing product investment.