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Testing Market Efficiency and Price Discovery in European Carbon Markets

Author

Listed:
  • George Milunovich

    (Department of Economics, Macquarie University)

  • Roselyne Joyeux

    (Department of Economics, Macquarie University)

Abstract

We examine the issues of market efficiency and price discovery in the European Union carbon futures market. Our findings suggest that none of the carbon futures contracts examined here are priced according to the cost-of-carry model, although two of the three futures contracts studied here form a stable long-run relationship with the spot price, and hence act as adequate risk mitigation instruments. We apply a new testing procedure and find weak evidence of convenience yield in the market for carbon allowances. In terms of price discovery, it appears that the spot and futures markets share information efficiently and contribute to price discovery jointly. Similar to the information diffusion pattern found in returns, we report some evidence of bi-directional volatility transfers between the spot and various futures contracts.

Suggested Citation

  • George Milunovich & Roselyne Joyeux, 2007. "Testing Market Efficiency and Price Discovery in European Carbon Markets," Research Papers 0701, Macquarie University, Department of Economics.
    • Handle: RePEc:mac:wpaper:0701
    as

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    File URL: http://www.econ.mq.edu.au/Econ_docs/research_papers2/2007_research_papers/MERP_1_2007_Milunovich_Joyeux_online.pdf
    File Function: First Version, 2007
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    More about this item

    Keywords

    Carbon-dioxide allowances; futures; cost-of-carry; price discovery; market efficiency; cointegration; granger causality; volatility spillover; global warming.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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