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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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    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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    References

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    Cited by:
    1. Schultz, Emma & Swieringa, John, 2014. "Catalysts for price discovery in the European Union Emissions Trading System," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 112-122.
    2. Yoichi Otsubo & Bruce Mizrach, 2012. "The Market Microstructure of the European Climate Exchange," LSF Research Working Paper Series 12-7, Luxembourg School of Finance, University of Luxembourg.
    3. Reboredo, Juan C., 2014. "Volatility spillovers between the oil market and the European Union carbon emission market," Economic Modelling, Elsevier, vol. 36(C), pages 229-234.
    4. Shawkat Hammoudeh & Amine Lahiani & Duc Khuong Nguyen & Ricardo M. Sousa, 2014. "Asymmetric and nonlinear pass-through of energy prices to CO2 emission allowance prices," NIPE Working Papers 05/2014, NIPE - Universidade do Minho.
    5. Conrad, Christian & Weber, Enzo, 2013. "Measuring Persistence in Volatility Spillovers," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79850, Verein für Socialpolitik / German Economic Association.
    6. Hai-Chuan Xu & Wei Zhang & Xiong Xiong & Wei-Xing Zhou, 2014. "An agent-based computational model for China's stock market and stock index futures market," Papers 1404.1052, arXiv.org.
    7. Chevallier, Julien, 2013. "Variance risk-premia in CO2markets," Economics Papers from University Paris Dauphine 123456789/11713, Paris Dauphine University.
    8. Shawkat Hammoudeh & Duc Khuong Nguyen & Ricardo M. Sousa, 2014. "What explains the short-term dynamics of the prices of CO2 emissions?," Working Papers 2014-081, Department of Research, Ipag Business School.
    9. Menelaos Karanasos & Alexandros Paraskevopoulos & Faek Menla Ali & Michail Karoglou & Stavroula Yfanti, 2014. "Modelling Returns and Volatilities During Financial Crises: a Time Varying Coefficient Approach," Papers 1403.7179, arXiv.org.
    10. 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).
    11. Antonakakis, Nikolaos & Kizys, Renatas & Floros, Christos, 2014. "Dynamic Spillover Effects in Futures Markets," MPRA Paper 53876, University Library of Munich, Germany.
    12. Medina, Vicente & Pardo, Ángel & Pascual, Roberto, 2014. "The timeline of trading frictions in the European carbon market," Energy Economics, Elsevier, vol. 42(C), pages 378-394.

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