Pricing Carbon Allowance Options on Futures: Insights from High-Frequency Data

Leveraging a unique dataset of carbon futures option prices traded on the ICE market from December 2015 until December 2020, we present the results from an unprecedented calibration exercise. Within a multifactor stochastic volatility framework with jumps, we employ a three-dimensional pricing kernel compensating for equity and variance components' risk to derive an analytically tractable and numerically practical approach to pricing. To the best of our knowledge, we are the first to provide an ...