Price discovery and volatility spillovers in the European Union emissions trading scheme: A high-frequency analysis
AbstractThis 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 InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 36 (2012)
Issue (Month): 3 ()
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Web page: http://www.elsevier.com/locate/jbf
CO2 emission allowances; Volatility transmission; Spot and futures prices; Causality;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
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