Measuring the European Carbon Market Efficiency - A Quantitative Evaluation of Higher Order Dependence

30 Pages Posted: 10 Dec 2021

See all articles by Cristina Sattarhoff

Cristina Sattarhoff

Kiel University

Marc Gronwald

Xi'an Jiaotong-Liverpool University (XJTLU) - International Business School Suzhou

Date Written: November 5, 2021

Abstract

This paper introduces a new method for measuring financial market efficiency: the so- called intermittency coefficient, a parameter of the multifractal random walk model by Bacry et al. (2001). As the intermittency coefficient can quantify the degree of nonlinear deviation from a random walk, we employ its estimates from financial data as a proxy for the loss of financial market efficiency. In addition, we propose a new statistical test of the random walk hypothesis. In an empirical application using data from the largest currently existing market for tradable pollution permits, the European Union Emissions Trading Scheme (EU ETS), we show that the degree of efficiency of this market remains largely unchanged over the period of observation 2008 { 2019. What is more, the EU ETS is found to be more efficient than the US stock market. This result, surprising as such, is attributable to the large share of well-informed market participants in the EU ETS as well as a lower exposure to global economic shocks.

Keywords: Weak-Form Market Efficiency, Degree of Market Efficiency, Multifractality, Multi- fractal Random Walk, European Union Emissions Trading Scheme

JEL Classification: C58, C53, G14, Q02, Q54

Suggested Citation

Sattarhoff, Cristina and Gronwald, Marc, Measuring the European Carbon Market Efficiency - A Quantitative Evaluation of Higher Order Dependence (November 5, 2021). USAEE Working Paper No. 21-531, Available at SSRN: https://ssrn.com/abstract=3980842 or http://dx.doi.org/10.2139/ssrn.3980842

Cristina Sattarhoff

Kiel University ( email )

Marc Gronwald (Contact Author)

Xi'an Jiaotong-Liverpool University (XJTLU) - International Business School Suzhou ( email )

111 Ren'ai Road
Suzhou Industrial Park
Suzhou, Jiangsu 215123
China

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