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Price discovery and volatility spillovers in the European Union emissions trading scheme: A high-frequency analysis

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  • Rittler, Daniel
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    Abstract

    This paper models the relationship of European Union Allowance spot- and futures-prices within the second commitment period of the European Union emissions trading scheme. Based on high-frequency data, we analyze the transmission of information in first and second conditional moments. To reveal long-run price discovery, we compute common factor weights of Schwarz and Szakmary (1994) and information shares of Hasbrouck (1995) based on estimated coefficients of a VECM. To analyze the short-run dynamics, we perform Granger-causality tests. We identify the futures market to be the leader of the long-run price discovery process, whereas the informational role of the futures market increases over time. In addition, we employ a version of the UECCC-GARCH model as introduced by Conrad and Karanasos (2010) to analyze the volatility transmission structure. The volatility analysis indicates a close relationship between the volatility dynamics of both markets, whereas in particular we observe spillovers from the futures to the spot market. As a whole the investigation reveals that the futures market incorporates information first and then transfers the information to the spot market.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378426611002639
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 3 ()
    Pages: 774-785

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:3:p:774-785

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

    Related research

    Keywords: CO2 emission allowances; Volatility transmission; Spot and futures prices; Causality;

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    Cited by:
    1. Oscar Carchano & Vicente Medina Martínez & Ángel Pardo Tornero, 2012. "Rolling over EUAs and CERs," Working Papers. Serie AD 2012-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    2. Conrad, Christian & Weber, Enzo, 2013. "Measuring Persistence in Volatility Spillovers," Working Papers 0543, University of Heidelberg, Department of Economics.

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