The hedging strategies in the EU ETS:An analysis from bidirectional spillover risk
ZHAO Lutao
HUANG Ting
CHEN Zheyi
AN Xingyu
Abstract：The European Union Emissions Trading System(EU ETS),as a relatively mature carbon market,has been hit by the tightening of carbon quotas and the energy crisis in recent years,which has plunged the carbon price into high volatility,and the risk of trading has risen sharply.As one of the risk management tools,hedging is highly popular among carbon market participants.However,the traditional hedging strategy often ignores the directional characteristics of risk transmission between carbon futures and spot market,and it is difficult to fit the complex and volatile pattern of carbon market,so that the effectiveness of hedging is not high.Therefore,this paper constructs a bidirectional spillover risk hedging strategy(BSRH),which aims to improve the effectiveness of hedging and reduce the overall risk.Firstly,a BEKK-GARCH model is applied to describe the bidirectional spillover risk between the carbon spot and futures markets.Secondly,the risk indicator(Rindex),which integrates risk and return,is introduced to measure the risk of the carbon market.Finally,an objective planning model is constructed to minimize Rindex to solve the optimal hedging ratio.The results show that the BSRH strategy significantly improves the hedging effectiveness by 17.71％,and the hedging effectiveness of the BSRH strategy is as high as 87％,96％,and 98％in daily,weekly,and monthly holding periods,respectively,which shows a higher hedging effectiveness than the traditional strategy in different holding periods.
Keywords：EU EBdynamic hedginghedge effectivenessbidirectional spillover riskrisk management
Publication Date：2025-01-28
Online Publishing Date：2025-08-15(First online date of this platform, not the publication date of the document)
Pages：11( 44-54 )