The Trading Potential of Cointegration: Taking Advantage of the Cointegration of Emission Allowances and Carbon-Intensive Energy Commodities.

Abstract

This thesis investigates the cointegration between the European Emission Allowances (EUA) and carbon-intensive energy commodities: coal, oil, and gas in the EU, the US, and Australia. We propose a directional trading strategy taking advantage of the cointegration between the assets, using the sign of EUA log returns as a signal for trading European Coal. The proposed directional trading strategy produced out-of-sample annualized returns of 112.4% and a Sharpe Ratio of 0.863, outperforming all benchmarks used in this thesis.