Price Discovery and Trading after Hours: New Evidence from the World’s Largest Carbon Exchange

Abstract

We investigate the impact of after-hours trading on magnitude and timing of price discovery over the close-to-close period on the world's largest carbon trading platform, the European Climate Exchange (ECX). Low volume trading in carbon financial instruments can lead to relatively high levels of price discovery but the generated pricing has low efficiency levels. This is informed by the high levels of informed trades and low levels of liquidity trades. Our results show higher trading volume per minute and price efficiency for after-hours when compared with regular trading hours. As a result of higher proportion of informed trades, adverse selection costs for trades during the after-hours are significantly larger than those for trades during the regular trading-day.

Price impact of block trades: the curious case of downstairs trading in the EU emissions futures market

“…The implication is that liquidity concerns in the EU-ETS play a less prominent role in emissions permits pricing than in customary markets. This is supported by Ibikunle, Gregoriou, and Pandit (2013), who find that small amounts of trading lead to larger proportions of price discovery in the EU-ETS. Short-run improvements in liquidity, though an important factor in market efficiency (see Chordia, Roll, and Subrahmanyam 2008), do not detract from block trade price impact on the world's largest carbon platform.…”

“…provide the longest timehorizon study of the EU-ETS to date; they argue that the ECX has experienced accelerated improvement in market efficiency and liquidity over the 2008-2011 period, the first four years of the Kyoto commitment phase. This view is also held by Kalaitzoglou and Maher Ibrahim (2013) and Ibikunle, Gregoriou, and Pandit (2013), whose analyses show evidence of improving market maturity and trading sophistication.…”

“…The fourth stage of trading is the after-hours period, reserved only for reporting Exchange for Physical/Swaps (EFP/EFS) trades. Ibikunle, Gregoriou, and Pandit (2013) have analysed the contribution of trades reported during this period to price discovery. These trades can be regarded as a form of upstairs trading in the context of the ECX, and hence will not be examined in this paper.…”

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

“…Market volumes have also increased significantly from year to year since trading started in 2005. It is a derivatives platform and most of the trading activities have consistently occurred in its December maturity contracts, Ibikunle et al (2013) …”

“…Ibikunle et al (2013) infer market efficiency from informational efficiency (the effectiveness of incorporating available information) on the ECX. They show that intraday evolution of market efficiency is contingent on trading activity, stopping short of linking long-term market efficiency to market liquidity.…”