Forecasting the Volatility of European Union Allowance Futures with Climate Policy Uncertainty Using the EGARCH-MIDAS Model

We propose the EGARCH-MIDAS-CPU model, which incorporates leverage effect and climate policy uncertainty (CPU) to model forecast European Union allowance futures’ (EUAF) volatility. An empirical analysis based on daily data of EUAF price index monthly CPU using shows that EUAF’s volatility exhibits a effect, has significantly negative impact Furthermore, out-of-sample three loss functions Model Confidence Set (MCS) test suggests yields more accurate forecasting results than various competing models. There is room for further application such as this could be applied carbon futures, so improve liquidity market achieve peak neutrality soon possible.