Price Discovery and Liquidity in the European CO2 Futures Market: An Intraday Analysis

Benz, Eva; Hengelbrock, Jördis

doi:10.2139/ssrn.1283175

Cited by 27 publications

(39 citation statements)

References 27 publications

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“…Montagnoli and de Vries (2010) also show that Phase I was an inefficient experiment, with thin trading leading to huge bias for EMH; the study goes on to examine trading in the early period of the second phase and report significant improvements in market efficiency. Benz and Klar (2008) provide the first insights into price discovery for the European carbon futures market. Using intraday data with the Engle and Granger (1987) VECM framework, they investigate estimated transaction costs in the now agreed inefficient Phase I (2005Phase I ( -2007 of the EU-ETS.…”

Section: Review Of Eu-ets Literature On Market Efficiency and Liquiditymentioning

confidence: 99%

“…Benz and Klar (2008) focus on price leadership between two platforms (ECX and NordPool) in the EU-ETS; while Rittler (2012) on price leadership between two instruments (spot and futures contracts). The former concludes that the ECX leads price discovery and the latter concludes that futures leads price discovery.…”

Section: Review Of Eu-ets Literature On Market Efficiency and Liquiditymentioning

confidence: 99%

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Liquidity and market efficiency in the world's largest carbon market

Ibikunle

Gregoriou

Hoepner

et al. 2016

The British Accounting Review

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We examine the world's largest carbon exchange, ICE's ECX, by applying Chordia et al. 's (2008) conception of short-horizon return predictability as an inverse indicator of market efficiency. We find a strong relationship between liquidity and market efficiency such that when spreads narrow, return predictability diminishes. This is more pronounced for the highest trading carbon futures and during periods of low liquidity. Since the start of trading in Phase II of the EU Emissions Trading Scheme (EU-ETS) prices have continuously moved nearer to unity with, efficient, random walk benchmarks, and this improves from year to year. Overall, our findings suggest trading quality in the EU-ETS has improved markedly and matures over the 2008-2011 compliance years.JEL Classifications: G12, G13, G14, G15, G18

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Section: Review Of Eu-ets Literature On Market Efficiency and Liquiditymentioning

confidence: 99%

Section: Review Of Eu-ets Literature On Market Efficiency and Liquiditymentioning

confidence: 99%

Liquidity and market efficiency in the world's largest carbon market

Ibikunle

Gregoriou

Hoepner

et al. 2016

The British Accounting Review

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“…Benz and Hengelbrock (2008) is the …rst market microstructure study of EUA futures. They analyzed the liquidity and price discovery of two EUA futures markets, ECX and Nord Pool for the Phase I 2005Phase I -2007.…”

Section: Introductionmentioning

confidence: 99%

“…While previous studies focused only on the EUA market, we also explore the CER market. We examine the price discovery contribution across spot and futures markets, a question which is not addressed by Benz and Hengelbrock (2008). Finally, we examine the predctive content of order imbalances for future EUA returns.…”

Section: Introductionmentioning

confidence: 99%

The Market Microstructure of the European Climate Exchange

Mizrach

Otsubo

2010

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThis paper analyzes the market microstructure of the European Climate Exchange, the largest EU ETS trading venue. The ECX captures 2=3 of the screen traded market in EUA and more than 90% in CER. 2009 Trading volumes total e22 billion and are growing, with EUA transactions doubling, and CER volume up 61%. Spreads range from e0:02 to e0:06 for EUA and from e0:07 to e0:18 for CER. Market impact estimates imply that an average trade will move the EUA market by 1:08 euro centimes and the CER market 4:29. Both Granger-Gonzalo and Hasbrouck information shares imply that approximately 90% of price discovery is taking place in the ECX futures market. We …nd imbalances in the order book help predict returns for up to three days. A simple trading strategy that enters the market long or short when the order imbalance is strong is pro…table even after accounting for spreads and market impact.

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“…Our approach consists in applying this research question to the study of ECX CO 2 emissions futures. The first use of intraday data for CO 2 emissions markets may be related to Benz and Klar (2008), who investigate the price discovery between various exchanges. To our best knowledge, our article constitutes the first attempt to derive the volatility properties of CO 2 emissions futures using realized measures.…”

Section: Introductionmentioning

confidence: 99%

On the realized volatility of the ECX CO2 emissions 2008 futures contract: distribution, dynamics and forecasting

Chevallier

Sévi

2009

Ann Finance

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Abstract:The recent implementation of the EU Emissions Trading Scheme (EU ETS) in January 2005 created new financial risks for emitting firms. To deal with these risks, options are traded since October 2006. Because the EU ETS is a new market, the relevant underlying model for option pricing is still a controversial issue. This article improves our understanding of this issue by characterizing the conditional and unconditional distributions of the realized volatility for the 2008 futures contract in the European Climate Exchange (ECX), which is valid during Phase II (2008)(2009)(2010)(2011)(2012) of the EU ETS. The realized volatility measures from naive, kernel-based and subsampling estimators are used to obtain inferences about the distributional and dynamic properties of the ECX emissions futures volatility. The distribution of the daily realized volatility in logarithmic form is shown to be close to normal. The mixture-of-distributions hypothesis is strongly rejected, as the returns standardized using daily measures of volatility clearly departs from normality. A simplified HAR-RV model (Corsi, 2009) with only a weekly component, which reproduces long memory properties of the series, is then used to model the volatility dynamics. Finally, the predictive accuracy of the HAR-RV model is tested against GARCH specifications using one-step-ahead forecasts, which confirms the HAR-RV superior ability. Our conclusions indicate that (i) the standard Brownian motion is not an adequate tool for option pricing in the EU ETS, and (ii) a jump component should be included in the stochastic process to price options, thus providing more efficient tools for risk-management activities.JEL Classification: C5, G1, Q4.

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Price Discovery and Liquidity in the European CO2 Futures Market: An Intraday Analysis

Cited by 27 publications

References 27 publications

Liquidity and market efficiency in the world's largest carbon market

Liquidity and market efficiency in the world's largest carbon market

The Market Microstructure of the European Climate Exchange

On the realized volatility of the ECX CO2 emissions 2008 futures contract: distribution, dynamics and forecasting

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