A Comparison of Reduced-Form Permit Price Models and their Empirical Performances

Abstract

Equilibrium models have been proposed in literature with the aim of describing the evolution of the price of emission permits. This paper derives _rst estimation methods for the calibration of three competing equilibrium models. Second, it demonstrates how their reduced-form versions are inter-related. Third, by means of calibration to historical data, it is shown how these reduced-form models perform in the current price-evolution framework also with respect to standard continuous time stochastic models.