Informational Efficiency of the EU ETS market – a study of price predictability and profitable trading

Piia Remes (née Aatola) (), Kimmo Ollikka and Markku Ollikainen

No 28, Working Papers from VATT Institute for Economic Research

Abstract: We study the informational efficiency of the European Emissions Trading Scheme, EU ETS market by simulating the trading in this emerging market. If the market is efficient, profitable trading should only exist locally in time. We adopt the Timmermann and Granger (2004) definition of efficiency and for the first time in the literature run a large set of econometric, technical analysis and combined models to forecast the emissions allowance price changes. These forecasts are then used as trading signals in the trading simulation. We find that the combined models outperform the other models in forecasting ability. Trading simulation based on models combining time series and technical analysis trading rules shows that there have been possibilities for profitable trading in the EU ETS market during the study period of 2008–2010. This suggests that the EU ETS market shows periods with no informational efficiency.

Keywords: European Union emissions trading, informational efficiency, econometric analysis, Energy, Energia, Environment, Ympäristö, Labor market and policies promoting economic growth, Työmarkkinat ja kasvua tukeva politiikka, Q520 - Pollution Control Costs; Distributional Effects; Employment Effects (Firm Behavior), Q530 - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling, (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-cmp, nep-ene, nep-env, nep-eur and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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