IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v42y2014icp112-122.html
   My bibliography  Save this article

Catalysts for price discovery in the European Union Emissions Trading System

Author

Listed:
  • Schultz, Emma
  • Swieringa, John

Abstract

We provide the first evidence on catalysts for price discovery in the European Union Emissions Trading System. Specifically, by employing high frequency data across a wide range of fungible securities, we find that trading costs are a more important determinant of price discovery than either the implicit provision of leverage in securities such as futures and options or the existence of market segmentation. Moreover, securities with low trading costs display greater price discovery than those with high trading costs.

Suggested Citation

  • Schultz, Emma & Swieringa, John, 2014. "Catalysts for price discovery in the European Union Emissions Trading System," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 112-122.
    • Handle: RePEc:eee:jbfina:v:42:y:2014:i:c:p:112-122
    DOI: 10.1016/j.jbankfin.2014.01.012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426614000260
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2014.01.012?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," The Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
    2. Blume, Marshall E. & Stambaugh, Robert F., 1983. "Biases in computed returns : An application to the size effect," Journal of Financial Economics, Elsevier, vol. 12(3), pages 387-404, November.
    3. Mansanet-Bataller, Maria & Chevallier, Julien & Hervé-Mignucci, Morgan & Alberola, Emilie, 2011. "EUA and sCER phase II price drivers: Unveiling the reasons for the existence of the EUA-sCER spread," Energy Policy, Elsevier, vol. 39(3), pages 1056-1069, March.
    4. repec:ebl:ecbull:v:30:y:2010:i:1:p:558-576 is not listed on IDEAS
    5. Charles, Amélie & Darné, Olivier & Fouilloux, Jessica, 2013. "Market efficiency in the European carbon markets," Energy Policy, Elsevier, vol. 60(C), pages 785-792.
    6. Julien Chevallier, 2010. "EUAs and CERs: Vector Autoregression, Impulse Response Function and Cointegration Analysis," Economics Bulletin, AccessEcon, vol. 30(1), pages 558-576.
    7. repec:dau:papers:123456789/4237 is not listed on IDEAS
    8. deB. Harris, Frederick H. & McInish, Thomas H. & Shoesmith, Gary L. & Wood, Robert A., 1995. "Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(4), pages 563-579, December.
    9. Rittler, Daniel, 2012. "Price discovery and volatility spillovers in the European Union emissions trading scheme: A high-frequency analysis," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 774-785.
    10. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    11. G. Geoffrey Booth & Raymond W. So & Yiuman Tse, 1999. "Price discovery in the German equity index derivatives markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 19(6), pages 619-643, September.
    12. Julien Chevallier, 2010. "A Note on Cointegrating and Vector Autoregressive Relationships between CO2 allowances spot and futures prices," Economics Bulletin, AccessEcon, vol. 30(2), pages 1564-1584.
    13. Vicente Medina & Angel Pardo & Roberto Pascual, 2013. "Carbon Credits: Who is the Leader of the Pack?," International Journal of Energy Economics and Policy, Econjournals, vol. 3(3), pages 210-220.
    14. Hasbrouck, Joel, 1995. "One Security, Many Markets: Determining the Contributions to Price Discovery," Journal of Finance, American Finance Association, vol. 50(4), pages 1175-1199, September.
    15. Mizrach, Bruce & Otsubo, Yoichi, 2014. "The market microstructure of the European climate exchange," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 107-116.
    16. Chan, Kalok, 1992. "A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market," The Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 123-152.
    17. Mizrach, Bruce, 2012. "Integration of the global carbon markets," Energy Economics, Elsevier, vol. 34(1), pages 335-349.
    18. repec:dau:papers:123456789/4226 is not listed on IDEAS
    19. Stoll, Hans R. & Whaley, Robert E., 1990. "The Dynamics of Stock Index and Stock Index Futures Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(4), pages 441-468, December.
    20. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    21. Hasbrouck, Joel, 2002. "Stalking the "efficient price" in market microstructure specifications: an overview," Journal of Financial Markets, Elsevier, vol. 5(3), pages 329-339, July.
    22. Baillie, Richard T. & Geoffrey Booth, G. & Tse, Yiuman & Zabotina, Tatyana, 2002. "Price discovery and common factor models," Journal of Financial Markets, Elsevier, vol. 5(3), pages 309-321, July.
    23. repec:dau:papers:123456789/5109 is not listed on IDEAS
    24. Roll, Richard, 1984. "A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-1139, September.
    25. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," The Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-667.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhao, Xin-gang & Jiang, Gui-wu & Nie, Dan & Chen, Hao, 2016. "How to improve the market efficiency of carbon trading: A perspective of China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 59(C), pages 1229-1245.
    2. Emma Schultz & John Swieringa, 2018. "Information linkages between emission allowance and energy markets," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(3), pages 921-935, September.
    3. Baudry, Marc & Faure, Anouk & Quemin, Simon, 2021. "Emissions trading with transaction costs," Journal of Environmental Economics and Management, Elsevier, vol. 108(C).
    4. Rannou, Yves & Boutabba, Mohamed Amine & Barneto, Pascal, 2021. "Are Green Bond and Carbon Markets in Europe complements or substitutes? Insights from the activity of power firms," Energy Economics, Elsevier, vol. 104(C).
    5. Wu, Xiangling & Ding, Shusheng, 2023. "The impact of the Bitcoin price on carbon neutrality: Evidence from futures markets," Finance Research Letters, Elsevier, vol. 56(C).
    6. Chang, Kai & Chen, Rongda & Chevallier, Julien, 2018. "Market fragmentation, liquidity measures and improvement perspectives from China's emissions trading scheme pilots," Energy Economics, Elsevier, vol. 75(C), pages 249-260.
    7. Narayan, Paresh Kumar & Sharma, Susan Sunila, 2015. "Is carbon emissions trading profitable?," Economic Modelling, Elsevier, vol. 47(C), pages 84-92.
    8. Demiralay, Sercan & Gencer, Hatice Gaye & Bayraci, Selcuk, 2022. "Carbon credit futures as an emerging asset: Hedging, diversification and downside risks," Energy Economics, Elsevier, vol. 113(C).
    9. Chang, Kai & Pei, Ping & Zhang, Chao & Wu, Xin, 2017. "Exploring the price dynamics of CO2 emissions allowances in China's emissions trading scheme pilots," Energy Economics, Elsevier, vol. 67(C), pages 213-223.
    10. Dutta, Anupam & Bouri, Elie & Noor, Md Hasib, 2018. "Return and volatility linkages between CO2 emission and clean energy stock prices," Energy, Elsevier, vol. 164(C), pages 803-810.
    11. Wen, Xiaoqian & Bouri, Elie & Roubaud, David, 2017. "Can energy commodity futures add to the value of carbon assets?," Economic Modelling, Elsevier, vol. 62(C), pages 194-206.
    12. Ibrahim, Boulis Maher & Kalaitzoglou, Iordanis Angelos, 2016. "Why do carbon prices and price volatility change?," Journal of Banking & Finance, Elsevier, vol. 63(C), pages 76-94.
    13. Friedrich, Marina & Mauer, Eva-Maria & Pahle, Michael & Tietjen, Oliver, 2020. "From fundamentals to financial assets: the evolution of understanding price formation in the EU ETS," EconStor Preprints 196150, ZBW - Leibniz Information Centre for Economics, revised 2020.
    14. Shrestha, Keshab & Naysary, Babak & Philip, Sheena Sara Suresh, 2023. "Price discovery in carbon exchange traded fund markets," International Review of Financial Analysis, Elsevier, vol. 89(C).
    15. Li, Zheng-Zheng & Li, Yameng & Huang, Chia-Yun & Peculea, Adelina Dumitrescu, 2023. "Volatility spillover across Chinese carbon markets: Evidence from quantile connectedness method," Energy Economics, Elsevier, vol. 119(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Medina, Vicente & Pardo, Ángel & Pascual, Roberto, 2014. "The timeline of trading frictions in the European carbon market," Energy Economics, Elsevier, vol. 42(C), pages 378-394.
    2. Chen, Wei-Peng & Chung, Huimin & Lien, Donald, 2016. "Price discovery in the S&P 500 index derivatives markets," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 438-452.
    3. Shuxin Guo, 2021. "Do futures lead the index under stress? Evidence from the 2015 Chinese market turmoil and its aftermath," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 91-110, January.
    4. Qiang Liu & Gaoxiu Qiao, 2017. "The evolving nature of intraday price discovery in the Chinese CSI 300 index futures market," Empirical Economics, Springer, vol. 52(4), pages 1569-1585, June.
    5. Fassas, Athanasios P. & Papadamou, Stephanos & Koulis, Alexandros, 2020. "Price discovery in bitcoin futures," Research in International Business and Finance, Elsevier, vol. 52(C).
    6. Yu-Lun Chen, 2020. "News announcements and price discovery in the RMB–USD market," Review of Quantitative Finance and Accounting, Springer, vol. 54(4), pages 1487-1508, May.
    7. Oliver Entrop & Bart Frijns & Marco Seruset, 2020. "The determinants of price discovery on bitcoin markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(5), pages 816-837, May.
    8. Zebedee, Allan A. & Kasch-Haroutounian, Maria, 2009. "A closer look at co-movements among stock returns," Journal of Economics and Business, Elsevier, vol. 61(4), pages 279-294, July.
    9. Koop, Gary & Tole, Lise, 2013. "Modeling the relationship between European carbon permits and certified emission reductions," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 166-181.
    10. Friedrich, Marina & Mauer, Eva-Maria & Pahle, Michael & Tietjen, Oliver, 2020. "From fundamentals to financial assets: the evolution of understanding price formation in the EU ETS," EconStor Preprints 196150, ZBW - Leibniz Information Centre for Economics, revised 2020.
    11. Hou, Yang & Nartea, Gilbert, 2017. "Price Discovery in the Stock Index Futures Market: Evidence from the Chinese stock market crash," MPRA Paper 81995, University Library of Munich, Germany.
    12. Madhusudan Karmakar & Sarveshwar Inani, 2019. "Information share and its predictability in the Indian stock market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(10), pages 1322-1343, October.
    13. Dong-Hyun Ahn & Jacob Boudoukh & Matthew Richardson & Robert F. Whitelaw, 2002. "Partial Adjustment or Stale Prices? Implications from Stock Index and Futures Return Autocorrelations," The Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 655-689, March.
    14. Ibrahim, Boulis Maher & Kalaitzoglou, Iordanis Angelos, 2016. "Why do carbon prices and price volatility change?," Journal of Banking & Finance, Elsevier, vol. 63(C), pages 76-94.
    15. Christoph Schmidhammer & Sebastian Lobe & Klaus Röder, 2016. "The day the index rose 11 %: a clinical study on price discovery reversal," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 79-106, January.
    16. Mazza, Paolo & Petitjean, Mikael, 2015. "How integrated is the European carbon derivatives market?," Finance Research Letters, Elsevier, vol. 15(C), pages 18-30.
    17. Hou, Yang & Li, Steven, 2017. "Time-Varying Price Discovery and Autoregressive Loading Factors: Evidence from S&P 500 Cash and E-Mini Futures Markets," MPRA Paper 81999, University Library of Munich, Germany.
    18. Kao, Chung-Wei & Wan, Jer-Yuh, 2009. "Information transmission and market interactions across the Atlantic -- an empirical study on the natural gas market," Energy Economics, Elsevier, vol. 31(1), pages 152-161, January.
    19. Karin Niehoff, 2016. "Price Discovery in Voting and Non-Voting Stocks," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 17(3), pages 285-307, December.
    20. Lin, Chu-Bin & Chou, Robin K. & Wang, George H.K., 2018. "Investor sentiment and price discovery: Evidence from the pricing dynamics between the futures and spot markets," Journal of Banking & Finance, Elsevier, vol. 90(C), pages 17-31.

    More about this item

    Keywords

    Price discovery; Trading costs; Emissions trading;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:42:y:2014:i:c:p:112-122. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.