Modeling and explaining the dynamics of European Union Allowance prices at high-frequency

In this paper we model the adjustment process of European Union Allowance (EUA) prices to the releases of announcements at high-frequency controlling for intraday periodicity, volatility clustering and volatility persistence. We find that the high-frequency EUA price dynamics are very well captured by a fractionally integrated asymmetric power GARCH process. The decisions of the European Commission on second National Allocation Plans have a strong and immediate impact on EUA prices. Further, EUA prices increase in response to better than expected news on the future economic development as well as the current economic activity in Germany and the U.S.