Equilibrium Pricing of Contingent Claims in Tradable Permit Markets

36 Pages·2009·0.65 MB·English

Introduction
TheModel
EquilibriumPriceswithoutBanking
TheEffectofBanking
Discussions
Conclusions
Equilibrium Pricing of Contingent Claims in
Tradable Permit Markets
MasaakiKijima , Akira Maeda , KatsumasaNishide
(a) (b) (
)
(a) GraduateSchoolofSocialScience,TokyoMetropolitanUniversity
(b) GraduateSchoolofEnergyScience,KyotoUniversity
(c) InterdisciplinaryResearchCenter,YokohamaNationalUniversity
The39thASTINColloquium– Helsinki, Finland
Thefullpaperisavailableat http://ssrn.com/abstract=1344103.
Kijima,MaedaandNishide EquilibriumPricingofContingentClaimsinTradablePermitMarkets
Introduction
TheModel
EquilibriumPriceswithoutBanking
TheEffectofBanking
Discussions
Conclusions
PlanofTalk
1 Introduction
2 TheModel
3 EquilibriumPrices withoutBanking
4 TheEffect ofBanking
5 Discussions
6 Conclusions
Kijima,MaedaandNishide EquilibriumPricingofContingentClaimsinTradablePermitMarkets
Introduction
TheModel
EquilibriumPriceswithoutBanking
TheEffectofBanking
Discussions
Conclusions
Introduction
Kijima,MaedaandNishide EquilibriumPricingofContingentClaimsinTradablePermitMarkets
Introduction
TheModel
EquilibriumPriceswithoutBanking
TheEffectofBanking
Discussions
Conclusions
KyotoProtocol
Thefirst five-yearcommitmentperiodstarted onJanuary
1,2008.
Ratifying countriesare requiredto meetthe cap of
pollutionemission amount.
Eachcountry also imposesthe emission limitation to its
industries.
Howto meetthe regulation:
Reducetheemissionamountbyself-efforts.
Buypollutionrights(pollutionpermit).
Kijima,MaedaandNishide EquilibriumPricingofContingentClaimsinTradablePermitMarkets
Introduction
TheModel
EquilibriumPriceswithoutBanking
TheEffectofBanking
Discussions
Conclusions
Statistics ofcarbonmarket(1)
Source:Carbon2007.
Kijima,MaedaandNishide EquilibriumPricingofContingentClaimsinTradablePermitMarkets
Introduction
TheModel
EquilibriumPriceswithoutBanking
TheEffectofBanking
Discussions
Conclusions
Statistics ofcarbonmarket(2)
Puts
ECX CFI Options Volume
Calls
30,000,000
25,000,000
2)
O
C 20,000,000
s
e
n
on 15,000,000
e (t
m 10,000,000
u
ol
V
5,000,000
0
Oct-0N6o v-0D6ec-0J6an-0F7eb-0M7ar-0A7pr-0M7ay-0J7un-0J7ul-0A7u g-S07ep-0O7 ct-0N7o v-0D7ec-0J7an-08
Date
Source:ECXpres-March2008.
Kijima,MaedaandNishide EquilibriumPricingofContingentClaimsinTradablePermitMarkets
Introduction
TheModel
EquilibriumPriceswithoutBanking
TheEffectofBanking
Discussions
Conclusions
Summaryofthepaper
Thepurposeofthe paperis to proposeapricing formula
thatevaluatesanycontingentclaim in thepollutionpermit
market.
Literaturereview:
CronshawandKruse(1996),Rubin(1996),Seifertetal.
(2008)onlyfocusonthespotprices.
Maeda(2004): onlytheforwardpriceisexamined.
Daskalakisetal. (2007),ChesneyandTaschini(2008): the
spotprice(underlying)isexogenouslygiven.
Toourbestknowledge,thispaperis the first to study the
pricing ofanycontingentclaim ofpermitmarkets in a
generalequilibriumframework.
Kijima,MaedaandNishide EquilibriumPricingofContingentClaimsinTradablePermitMarkets
Introduction
TheModel
EquilibriumPriceswithoutBanking
TheEffectofBanking
Discussions
Conclusions
Pricing Functional
Let bethe payoffofanycontingentclaim.
Y~
It is a well-knownresult in thefinance literature thatthe
price of ,denotedby , can beexpressed with some
Y~ (cid:25)(Y~)
randomvariable as
(cid:30)~
(cid:25)(Y~) =E[(cid:30)~Y~℄:
Ther.v. is a so-called state price density.
(cid:30)~
Kijima,MaedaandNishide EquilibriumPricingofContingentClaimsinTradablePermitMarkets
Introduction
TheModel
EquilibriumPriceswithoutBanking
TheEffectofBanking
Discussions
Conclusions
The Model
Kijima,MaedaandNishide EquilibriumPricingofContingentClaimsinTradablePermitMarkets
Introduction
TheModel
EquilibriumPriceswithoutBanking
TheEffectofBanking
Discussions
Conclusions
Themarket
2-periodeconomy: time 0 (present)andtime 1 (future).
Market participants(all price takers)
regulatedemitterswhoneedtomeetthecapofemission.
unregulatedfinancialtraderswhoarenotobliged tofollow
theregulation.
Attime 0,there aretwo markets:
Spotmarket: spotpermitsoftime0aretraded.
Contingentclaimsmarket: contingentclaimswrittenonthe
permitsoftime1aretraded.
Thecontingentclaimsmarket is completein the sense that
anycontingentclaim istradable.
Kijima,MaedaandNishide EquilibriumPricingofContingentClaimsinTradablePermitMarkets