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Carbon trading thickness and market efficiency: A non-parametric test

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  • de, Vries Frans
  • Montagnoli, Alberto

Abstract

This note tests for the efficient market hypothesis (EMH) in the market for CO2 emission allowances in Phase I and Phase II of the European Union Emissions Trading Scheme (EU ETS). As usually is the case in emerging and non-competitive markets such as the EU ETS, trading often not occurs on a frequent basis. This has adverse implications for both the gains from permit trade as well as biases the EMH tests. Variance ratio tests are employed to adjust for the thin trading effect. The results indicate that Phase I - the trial and learning period - was inefficient, whereas the first period under Phase II shows signs of restoring market effic iency.

Suggested Citation

  • de, Vries Frans & Montagnoli, Alberto, 2009. "Carbon trading thickness and market efficiency: A non-parametric test," Stirling Economics Discussion Papers 2009-22, University of Stirling, Division of Economics.
    • Handle: RePEc:stl:stledp:2009-22
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    File URL: http://hdl.handle.net/1893/1704
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    References listed on IDEAS

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    Keywords

    pollution markets; carbon trading; efficient market hypothesis; thin trading; variance ratio tests;
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