The Market Microstructure of the European Climate Exchange

29 Pages Posted: 7 Jun 2010 Last revised: 14 Jul 2013

Bruce Mizrach

Rutgers University, Department of Economics

Yoichi Otsubo

University of Manchester - Manchester Business School

Date Written: July 12, 2013

Abstract

This paper analyzes the market microstructure of the European Climate Exchange, the largest EU ETS trading venue. The ECX captures 2/3 of the screen traded market in EUA and more than 90% in CER. Volume growth has averaged 277% in EUA between 2005 and 2009 and 724% in CER since 2007. Spreads range from €0.0188 to €0.0406 for EUA and €0.0276 to €0.0541 for CER. The median proportion of the spread due to adverse selection reaches 76% for EUA and 75% for CER. Realized volatility, bid-ask spreads and adverse selection costs decline with verified emission releases. Market impact estimates imply that an average trade will move the EUA market by 1.05 euro centimes and the CER market 1.44. The ECX is providing between 75% and 88% of price discovery for EUA trading and between 64% and 72% for CER. We find imbalances in the order book help predict returns for up to three days. A simple trading strategy that enters the market long or short when the order imbalance is strong is profitable even after accounting for spreads and market impact.

Keywords: carbon trading, market microstructure, bid-ask spread, market impact, information shares, order imbalance

JEL Classification: G13, G32, E44

Suggested Citation

Mizrach, Bruce and Otsubo, Yoichi, The Market Microstructure of the European Climate Exchange (July 12, 2013). Available at SSRN: https://ssrn.com/abstract=1621340 or http://dx.doi.org/10.2139/ssrn.1621340

Bruce Mizrach (Contact Author)

Rutgers University, Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States
(848) 932-8636 (Phone)
(732) 932-7416 (Fax)

HOME PAGE: http://snde.rutgers.edu/

Yoichi Otsubo

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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