Testing Market Efficiency and Price Discovery in European Carbon Markets

George Milunovich and Roselyne Joyeux

No 701, Research Papers from Macquarie University, Department of Economics

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.

Keywords: Carbon-dioxide allowances; futures; cost-of-carry; price discovery; market efficiency; cointegration; granger causality; volatility spillover; global warming. (search for similar items in EconPapers)
JEL-codes: C32 G13 G14 Q25 Q40 (search for similar items in EconPapers)
Pages: 42 pages.
Date: 2007-03
New Economics Papers: this item is included in nep-eec, nep-ene, nep-env and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:mac:wpaper:0701

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