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

Ibikunle, Gbenga; Gregoriou, Andros; Hoepner, Andreas G.F.; Hoepner, Andreas G. F.; Rhodes, Mark

Authors

Gbenga Ibikunle

Andros Gregoriou

Andreas G.F. Hoepner

Andreas G. F. Hoepner

Mark Rhodes



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.

Publication Date Dec 1, 2016
Journal British accounting review
Print ISSN 0890-8389
Electronic ISSN 1095-8347
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 48
Issue 4
Pages 431-447
APA6 Citation Ibikunle, G., Gregoriou, A., Hoepner, A. G. F., & Rhodes, M. (2016). Liquidity and market efficiency in the world's largest carbon market. The British accounting review, 48(4), 431-447. https://doi.org/10.1016/j.bar.2015.11.001
DOI https://doi.org/10.1016/j.bar.2015.11.001
Keywords Liquidity; Order flow; Market efficiency; Return predictability; European climate exchange; EU Emissions Trading Scheme (EU-ETS); Carbon futures
Publisher URL http://www.sciencedirect.com/science/article/pii/S0890838915300032
Copyright Statement ©2017, Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Additional Information Authors' accepted manuscript of article published in: British accounting review, 2016, v.48, issue 4.

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Copyright Statement
©2017, Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/





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