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The timeline of trading frictions in the European carbon market

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  • Medina, Vicente
  • Pardo, Ángel
  • Pascual, Roberto
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    Abstract

    During its trial phase (Phase I), the EU Greenhouse Gas Emission Trading Scheme (EU-ETS) collapsed because of an over-allocation of emission allowances. We evaluate the progress of this market from the trial phase to the next commitment period (Phase II) from a microstructure angle. We show that trading frictions, as measured by the relative spread, information-asymmetry risk, and market-making profits decreased from Phase I to Phase II. Although volatility decreased, its noise-related component gained in importance at the expense of its information-related component, resulting in lower quality of the price changes.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 42 (2014)
    Issue (Month): C ()
    Pages: 378-394

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    Handle: RePEc:eee:eneeco:v:42:y:2014:i:c:p:378-394

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    Web page: http://www.elsevier.com/locate/eneco

    Related research

    Keywords: European Union Emission Trading Scheme; European Union Allowances; Trading frictions; Informativeness of prices; Market quality; Market microstructure;

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