Liquidity and market efficiency in the world's largest carbon market

Gbenga Ibikunle; Andros Gregoriou; Andreas Hoepner; Mark Rhodes

doi:10.1016/j.bar.2015.11.001

Liquidity and market efficiency in the world's largest carbon market

Gbenga Ibikunle, Andros Gregoriou, Andreas Hoepner, Mark Rhodes

Research output: Contribution to journal › Article › peer-review

Abstract

We investigate liquidity and market efficiency on the world’s largest carbon exchange, IntercontinentalExchange Inc.’s European Climate Exchange (ECX), by using intraday 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 that trading quality in the EU-ETS has improved markedly and matures over the 2008-2011 compliance years.

Original language	English
Pages (from-to)	431-447
Journal	British Accounting Review
Volume	48
Issue number	4
Early online date	27 Nov 2015
DOIs	https://doi.org/10.1016/j.bar.2015.11.001
Publication status	Published - Dec 2016

Keywords / Materials (for Non-textual outputs)

liquidity
order flow
market efficiency
return predictability
EU Emissions Trading Scheme (EU-ETS)
carbon futures

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10.1016/j.bar.2015.11.001

IbikunleEtal2015BARLiquidityAndMarketEfficiencyInTheWorldsAccepted author manuscript, 1.03 MBLicence: Creative Commons: Attribution-NonCommercial-NoDerivatives (CC BY-NC-ND)

Gbenga Ibikunle
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title = "Liquidity and market efficiency in the world's largest carbon market",

abstract = "We investigate liquidity and market efficiency on the world{\textquoteright}s largest carbon exchange, IntercontinentalExchange Inc.{\textquoteright}s European Climate Exchange (ECX), by using intraday 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 that 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, EU Emissions Trading Scheme (EU-ETS), carbon futures",

author = "Gbenga Ibikunle and Andros Gregoriou and Andreas Hoepner and Mark Rhodes",

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month = dec,

doi = "10.1016/j.bar.2015.11.001",

language = "English",

volume = "48",

pages = "431--447",

journal = "British Accounting Review",

issn = "0890-8389",

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T1 - Liquidity and market efficiency in the world's largest carbon market

AU - Ibikunle, Gbenga

AU - Gregoriou, Andros

AU - Hoepner, Andreas

AU - Rhodes, Mark

PY - 2016/12

Y1 - 2016/12

N2 - We investigate liquidity and market efficiency on the world’s largest carbon exchange, IntercontinentalExchange Inc.’s European Climate Exchange (ECX), by using intraday 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 that trading quality in the EU-ETS has improved markedly and matures over the 2008-2011 compliance years.

AB - We investigate liquidity and market efficiency on the world’s largest carbon exchange, IntercontinentalExchange Inc.’s European Climate Exchange (ECX), by using intraday 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 that trading quality in the EU-ETS has improved markedly and matures over the 2008-2011 compliance years.

KW - liquidity

KW - order flow

KW - market efficiency

KW - return predictability

KW - EU Emissions Trading Scheme (EU-ETS)

KW - carbon futures

U2 - 10.1016/j.bar.2015.11.001

DO - 10.1016/j.bar.2015.11.001

M3 - Article

SN - 0890-8389

VL - 48

SP - 431

EP - 447

JO - British Accounting Review

JF - British Accounting Review

IS - 4

ER -

Liquidity and market efficiency in the world's largest carbon market

Abstract

Keywords / Materials (for Non-textual outputs)

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Gbenga Ibikunle

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