An Interval Pricing Model For Carbon Emission Futures Based On The Incomplete Market

The international carbon emission market equips countries to deal with climate and environment changes. Studying the pricing mechanism of carbon emission futures, which is one of the primary derivatives of carbon emission products, can provide a better explanation of the futures price trends, improve the price discovery function, and help carbon investors to avoid trading risk. Furthermore, the study can promote the healthy and orderly development of the entire carbon emission market.The carbon emission market has not been fully developed, and is an incomplete market. Most of the existing research methods are applied to the complete market, and the market factors in the actual carbon emission market are ignored. Based on the incomplete market hypothesis, this paper researches the carbon emission futures pricing by using the futures interval pricing method and considering the transaction costs, deposit and loan spreads, and other market factors. Two most representative carbon assets (EUA & CER) are selected as the research objects. Study sample is 2013-2015 European carbon emissions trading market data. It is found that carbon emission futures interval pricing model can better describe the short-term carbon emissions futures prices; and the closer to the expiration date, the better contract price effectwill be. In addition, the interval pricing model of carbon emission is significantly superior to the traditional holding cost pricing model. With further study on the deviation between the pricing result and the actual price by regression analysis, it is found that the current deviation is due to the impact of carbon emissions trading market; and the longer the contract due date, the moreprice deviation will be.The contribution of this paper is to develop a method for the pricing of carbon emission futures. Moreover, the pricing model is for the incomplete market, which is in accordance with the status quo of carbon market. At the same time, it can provide a theoretical basis for investors to make reasonable decisions and avoid the risk of carbon emission market.