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Testing Market Efficiency and Price Discovery in European Carbon Markets

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Author Info

  • George Milunovich

    ()
    (Department of Economics, Macquarie University)

  • Roselyne Joyeux

    ()
    (Department of Economics, Macquarie University)

Abstract

We examine the issues of market efficiency and price discovery in the European Union carbon futures market. Our findings suggest that none of the carbon futures contracts examined here are priced according to the cost-of-carry model, although two of the three futures contracts studied here form a stable long-run relationship with the spot price, and hence act as adequate risk mitigation instruments. We apply a new testing procedure and find weak evidence of convenience yield in the market for carbon allowances. In terms of price discovery, it appears that the spot and futures markets share information efficiently and contribute to price discovery jointly. Similar to the information diffusion pattern found in returns, we report some evidence of bi-directional volatility transfers between the spot and various futures contracts.

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File URL: http://www.econ.mq.edu.au/Econ_docs/research_papers2/2007_research_papers/MERP_1_2007_Milunovich_Joyeux_online.pdf
File Function: First Version, 2007
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Bibliographic Info

Paper provided by Macquarie University, Department of Economics in its series Research Papers with number 0701.

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Length: 42 pages.
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:mac:wpaper:0701

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Postal: Sydney NSW 2109
Web page: http://www.econ.mq.edu.au/
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Related research

Keywords: Carbon-dioxide allowances; futures; cost-of-carry; price discovery; market efficiency; cointegration; granger causality; volatility spillover; global warming.;

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Cited by:
  1. Anna Creti & Pierre-André Jouvet & Valérie Mignon, 2011. "Carbon Price Drivers: Phase I versus Phase II Equilibrium?," Working Papers 1106, Chaire Economie du Climat.

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