Liquidity and Market Efficiency: European Evidence from the World's Largest Carbon Market

Gbenga Ibikunle, Andros Gregoriou, Andreas Hoepner, Mark Rhodes

Research output: Working paper

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.
Original languageEnglish
Number of pages41
Publication statusUnpublished - 2012

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