Liquidity and Market Efficiency in the World’s Largest Carbon Market

46 Pages Posted: 31 Jan 2012 Last revised: 17 Jan 2016

See all articles by Gbenga Ibikunle

Gbenga Ibikunle

University of Edinburgh; European Capital Markets Cooperative Research Centre

Andros Gregoriou

University of Brighton

Andreas G. F. Hoepner

Smurfit Graduate Business School, University College Dublin; European Commission's Platform on Sustainable Finance

Mark Rhodes

Hull University Business School (HUBS)

Date Written: November 22, 2015

Abstract

We examine the world’s largest carbon exchange, ICE’s ECX, by applying Chordia et al.’s (2008) conception of 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 trading quality in the EU-ETS has improved markedly and matures over the 2008-2011 compliance years.

Keywords: Liquidity, Order flow, Market efficiency, Return predictability, European Climate Exchange, EU Emissions Trading Scheme (EU-ETS), Carbon futures, Climate change

JEL Classification: G12, G13, G14, G15, G18

Suggested Citation

Ibikunle, Gbenga and Gregoriou, Andros and Hoepner, Andreas G. F. and Rhodes, Mark, Liquidity and Market Efficiency in the World’s Largest Carbon Market (November 22, 2015). British Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1995628 or http://dx.doi.org/10.2139/ssrn.1995628

Gbenga Ibikunle (Contact Author)

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

European Capital Markets Cooperative Research Centre ( email )

Viale Pidaro 42
Pescara, 65121
Italy

Andros Gregoriou

University of Brighton ( email )

Brighton
Brighton, BN2 4AT
United Kingdom

Andreas G. F. Hoepner

Smurfit Graduate Business School, University College Dublin ( email )

Blackrock, Co. Dublin
Ireland

European Commission's Platform on Sustainable Finance ( email )

2 Rue de Spa
Brussels, 1000
Belgium

Mark Rhodes

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
272
Abstract Views
1,597
rank
143,943
PlumX Metrics