The Market Microstructure of the European Climate Exchange
AbstractThis paper analyzes the market microstructure of the European Climate Exchange, the largest EU ETS trading venue. The ECX captures 2/3 of the screen traded market in EUA and more than 90% in CER. Trading volumes are active, with EUA volume doubling in 2009. Spreads range from €0.02 to €0.06 for EUA futures and from €0.07 to €0.18 for CER. Market impact estimates imply that an average trade will move the EUA market by €0.0108 and the CER market €0.0429. Both Granger-Gonzalo and Hasbrouck information shares imply that approximately 90% of price discovery is taking place in the ECX futures market. We find imbalances in the order book help predict returns for up to three days. A simple trading strategy that enters the market long or short when the order imbalance is strong is profitable even after accounting for spreads and market impact.
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Bibliographic InfoPaper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 201005.
Length: 20 pages
Date of creation: 03 Jul 2010
Date of revision:
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carbon trading; market microstructure; bid-ask spread; market impact; information shares;
Other versions of this item:
- 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.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-17 (All new papers)
- NEP-ENE-2010-07-17 (Energy Economics)
- NEP-ENV-2010-07-17 (Environmental Economics)
- NEP-EUR-2010-07-17 (Microeconomic European Issues)
- NEP-MST-2010-07-17 (Market Microstructure)
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- Vicente Medina Martínez & Ángel Pardo Tornero & Roberto Pascual, 2012. "The timeline of trading fricions in the European Carbon Market," Working Papers. Serie AD 2012-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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