Market Efficiency and Price Discovery in the EU Carbon Futures Market

28 Pages Posted: 29 May 2007 Last revised: 24 May 2014

See all articles by George Milunovich

George Milunovich

Macquarie University - Department of Economics; Macquarie University, Macquarie Business School

Roselyne Joyeux

Macquarie University - Department of Economics; Financial Research Network (FIRN); Macquarie University, Macquarie Business School

Date Written: May 28, 2007

Abstract

We examine the issues of market efficiency and price discovery in the European Union carbon futures market. Our findings suggest that none of the three carbon futures contracts examined here are priced according to the cost-of-carry model, although two of the three contracts form a stable long-run relationship with the spot price and interest rates, and hence act as adequate risk mitigation instruments. In terms of information diffusion between the futures and spot contracts, it appears that the spot and futures markets share information efficiently and contribute to price discovery jointly. However, our analysis suggests that the predominant source of information spillovers appears to be the sign or direction of price change, i.e. return spillover, rather than the magnitude of price change, i.e. volatility spillover.

Keywords: Carbon-Dioxide Allowances, Futures, Cost-of-Carry, Price Discovery, Market Efficiency, Cointegration, Granger Causality, Volatility Spillover, Global Warming

JEL Classification: C32, G13, G14, C32, Q25, Q40

Suggested Citation

Milunovich, George and Joyeux, Roselyne, Market Efficiency and Price Discovery in the EU Carbon Futures Market (May 28, 2007). Applied Financial Economics, Vol. 20, No. 10, 2010. Available at SSRN: https://ssrn.com/abstract=989272

George Milunovich (Contact Author)

Macquarie University - Department of Economics ( email )

Sydney NSW 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Roselyne Joyeux

Macquarie University - Department of Economics ( email )

Sydney NSW 2109
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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