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Informational efficiency of the EU ETS market - a study of price predictability and profitable trading

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  • Piia Aatola
  • Kimmo Ollikka
  • Markku Ollikainen

Abstract

We study the informational efficiency of the European Emissions Trading Scheme, EU ETS market, by simulating the trading in this emerging market. If the market is efficient, profitable trading should only exist locally in time. We adopt the Timmermann and Granger (2004) definition of efficiency and run a large set of econometric, technical analysis and combined models to forecast the emissions allowance price changes. These forecasts are then used as trading signals in the trading simulation. We find that the combined models outperform the other models in forecasting ability. Trading simulation based on models combining time series and technical analysis trading rules shows that there have been possibilities for profitable trading in the EU ETS market during the study period of 2008-2010. This suggests that the EU ETS market shows periods with no informational efficiency.

Suggested Citation

  • Piia Aatola & Kimmo Ollikka & Markku Ollikainen, 2014. "Informational efficiency of the EU ETS market - a study of price predictability and profitable trading," Journal of Environmental Economics and Policy, Taylor & Francis Journals, vol. 3(1), pages 92-123, March.
    • Handle: RePEc:taf:teepxx:v:3:y:2014:i:1:p:92-123
    DOI: 10.1080/21606544.2013.865569
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    Cited by:

    1. Ye, Jing & Xue, Minggao, 2021. "Influences of sentiment from news articles on EU carbon prices," Energy Economics, Elsevier, vol. 101(C).
    2. Yun-Jung Lee & Neung-Woo Kim & Ki-Hong Choi & Seong-Min Yoon, 2020. "Analysis of the Informational Efficiency of the EU Carbon Emission Trading Market: Asymmetric MF-DFA Approach," Energies, MDPI, vol. 13(9), pages 1-14, May.
    3. Friedrich, Marina & Mauer, Eva-Maria & Pahle, Michael & Tietjen, Oliver, 2020. "From fundamentals to financial assets: the evolution of understanding price formation in the EU ETS," EconStor Preprints 196150, ZBW - Leibniz Information Centre for Economics, revised 2020.

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