Forecasting European carbon returns using dimension reduction techniques: Commodity versus financial fundamentals

Using a broad selection of 53 carbon (EUA) related, commodity and financial predictors, we provide a comprehensive assessment of the out-of-sample (OOS) predictability of weekly European carbon futures return. We assess forecast performance using both statistical and economic value metrics over an OOS period spanning from January 2013 to May 2018. Two main types of dimension reduction techniques are employed: (i) shrinkage of coefficient...