Segnon, Mawuli K.Lux, ThomasGupta, Rangan2017-03-302017-03Segnon, M, Lux, T & Gupta, R 2017, 'Modeling and forecasting the volatility of carbon dioxide emission allowance prices : a review and comparison of modern volatility models', Renewable and Sustainable Energy Reviews, vol. 69, pp. 692-704.1364-0321 (print)1879-0690 (online)/10.1016/j.rser.2016.11.060http://hdl.handle.net/2263/59586The launch of the markets for carbon dioxide emission allowances was guided by the aim to use the supposedly efficient price formation mechanism of an organized exchange to optimally allocate a certain quantity of emissions among potential polluters. While this introduction of a centralized trading arrangement should have helped to achieve required emission reductions with a minimum of economic losses, from the viewpoint of market participants it has raised concerns about appropriate risk management provisions to cope with the fluctuations of time-varying allowance prices. The present review provides an overview over state-of-the-art models for price volatility expanding the scope from relatively simple GARCH-type models to models with longterm dependence and regime switches including the relatively recent class of so-called multifractal models. We provide a comparative application of these models to carbon dioxide emission allowance prices from the European Union Emission Trading Scheme and evaluate their performance with up-to-date model comparison tests based on out-of-sample forecasts of future volatility and value-at-risk.en© 2016 Elsevier Ltd. All rights reserved. Notice : this is the author’s version of a work that was accepted for publication in Renewable and Sustainable Energy Reviews . Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. A definitive version was subsequently published in Renewable and Sustainable Energy Reviews, vol. 69, pp. 692-704, 2017. doi : /10.1016/j.rser.2016.11.060.Carbon dioxide emission allowance pricesGARCHMarkov-switching GARCHFIGARCHMultifractal processesSPA testEncompassing testBacktestingPostprint Article