Abstract
Abstract. In this paper, we construct a permit market model to derive a pricing formula of contingent claims traded in the market in a general equilibrium
framework. It is shown that prices of contingent claims exhibit significantly different properties from those in the ordinary financial markets. In particular, if the social cost function kinks at some level of abatement, the
forward price as well as the spot price can be subject to the so-called price spike. However, this price-spike phenomenon can be weakened if the system of banking and borrowing is properly introduced.
Keywords: Tradable permits, emission trading, state price density
Page
1-30
Year
2009
Categories
Financial and Statistical Methods
Risk Pricing and Risk Evaluation Models
State-Pricing Methods
Publications
ASTIN Colloquium
