Liquidity and market efficiency in the world’s largest carbon market

Ibikunle, G., Gregoriou, A., Hoepner, A. and Rhodes, M. (2016) Liquidity and market efficiency in the world’s largest carbon market. The British Accounting Review, 48 (4). pp. 431-447. ISSN 0890-8389 doi: 10.1016/j.bar.2015.11.001

Abstract/Summary

We investigate liquidity and market efficiency on the world's largest carbon exchange, IntercontinentalExchange Inc.’s European Climate Exchange (ECX), by using intraday short-horizon return predictability as an inverse indicator of market efficiency. We find a strong relationship between liquidity and market efficiency such that when spreads narrow, return predictability diminishes. This is more pronounced for the highest trading carbon futures and during periods of low liquidity. Since the start of trading in Phase II of the EU Emissions Trading Scheme (EU-ETS) prices have continuously moved nearer to unity with efficient, random walk benchmarks, and this improves from year to year. Overall, our findings suggest that trading quality in the EU-ETS has improved markedly and matures over the 2008–2011 compliance years.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/53226
Identification Number/DOI	10.1016/j.bar.2015.11.001
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Elsevier
Download/View statistics	View download statistics for this item