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

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


Gbenga Ibikunle

Andros Gregoriou

Andreas G. F. Hoepner

Mark Rhodes


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.


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.

Acceptance Date Nov 22, 2015
Online Publication Date Nov 27, 2015
Publication Date Dec 1, 2016
Deposit Date Dec 23, 2015
Publicly Available Date Dec 13, 2017
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
Keywords Liquidity; Order flow; Market efficiency; Return predictability; European climate exchange; EU Emissions Trading Scheme (EU-ETS); Carbon futures
Public URL
Publisher URL
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

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