AUTHOR=Wu Xinyu , Mei Xueting , Ding Zhongming TITLE=Forecasting the volatility of European Union allowance futures with time-varying higher moments and time-varying risk aversion JOURNAL=Frontiers in Environmental Science VOLUME=10 YEAR=2022 URL=https://www.frontiersin.org/journals/environmental-science/articles/10.3389/fenvs.2022.973438 DOI=10.3389/fenvs.2022.973438 ISSN=2296-665X ABSTRACT=

There is increasing evidence that European Union allowance (EUA) futures return distributions exhibit features of time-varying higher moments (skewness and kurtosis), which plays an important role in modeling and forecasting EUA futures volatility. Moreover, a number of studies have shown that time-varying risk aversion (RA) contains useful information for forecasting EUA futures volatility. In light of this, this paper proposes the GARCH-MIDAS with skewness and kurtosis (hereafter GARCH-MIDAS-SK) to empirically investigate the impact and predictive role of RA on EUA futures volatility. Our empirical results show that RA has a significantly negative impact on the long-term volatility of EUA futures. The EUA futures return distributions exhibit obvious features of time-varying higher moments. Incorporating RA and time-varying higher moments improves the in-sample fitting of the model. Furthermore, out-of-sample results suggest that incorporating RA and time-varying higher moments leads to significantly more accurate volatility forecasts. This finding is robust to alternative out-of-sample forecasting windows.