IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v28y2011i1p27-35.html
   My bibliography  Save this article

Testing the martingale difference hypothesis in CO2 emission allowances

Author

Listed:
  • Charles, Amélie
  • Darné, Olivier
  • Fouilloux, Jessica

Abstract

This study examines the martingale difference hypothesis (MDH) for the carbon emission allowance market within the European Union Emission Trading Scheme (EU ETS) during the Phase I and the Phase II, using both daily and weekly data over the 2005–2009 period. We analyze the MDH for spot prices negotiated on BlueNext, European Energy Exchange and Nord Pool along with futures prices negotiated on BlueNext and European Climate Exchange, using the new variance ratio tests developed by Kim (2009) and the generalized spectral test proposed by Escanciano and Velasco (2006). For the Phase I, the results show that the spot price changes of these three markets are predictable, suggesting the possibility of abnormal returns through speculation, except during the period April 2006 to October 2006, namely after the compliance break and before the ECs of stricter NAP II. Finally, we find that the CO2 spot and futures price changes are unpredictable during the Phase II because we failed to reject the MDH based on both daily and weekly data. Thus, these markets are found to be weak-form efficient.

Suggested Citation

  • Charles, Amélie & Darné, Olivier & Fouilloux, Jessica, 2011. "Testing the martingale difference hypothesis in CO2 emission allowances," Economic Modelling, Elsevier, vol. 28(1), pages 27-35.
    • Handle: RePEc:eee:ecmode:v:28:y:2011:i:1:p:27-35
    DOI: 10.1016/j.econmod.2010.10.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999310002063
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econmod.2010.10.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chow, K. Victor & Denning, Karen C., 1993. "A simple multiple variance ratio test," Journal of Econometrics, Elsevier, vol. 58(3), pages 385-401, August.
    2. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September.
    3. Hintermann, Beat, 2010. "Allowance price drivers in the first phase of the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 43-56, January.
    4. Chen, Willa W. & Deo, Rohit S., 2006. "The Variance Ratio Statistic At Large Horizons," Econometric Theory, Cambridge University Press, vol. 22(2), pages 206-234, April.
    5. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," The Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
    6. repec:dau:papers:123456789/4222 is not listed on IDEAS
    7. Emilie Alberola & Julien Chevallier, 2009. "European Carbon Prices and Banking Restrictions: Evidence from Phase I (2005-2007)," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 51-80.
    8. Seifert, Jan & Uhrig-Homburg, Marliese & Wagner, Michael, 2008. "Dynamic behavior of CO2 spot prices," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 180-194, September.
    9. Stern,Nicholas, 2007. "The Economics of Climate Change," Cambridge Books, Cambridge University Press, number 9780521700801.
    10. J. Carlos Escanciano & Ignacio N. Lobato, 2009. "Testing the Martingale Hypothesis," Palgrave Macmillan Books, in: Terence C. Mills & Kerry Patterson (ed.), Palgrave Handbook of Econometrics, chapter 20, pages 972-1003, Palgrave Macmillan.
    11. Benz, Eva & Trück, Stefan, 2009. "Modeling the price dynamics of CO2 emission allowances," Energy Economics, Elsevier, vol. 31(1), pages 4-15, January.
    12. Lo, Andrew W. & MacKinlay, A. Craig, 1989. "The size and power of the variance ratio test in finite samples : A Monte Carlo investigation," Journal of Econometrics, Elsevier, vol. 40(2), pages 203-238, February.
    13. Escanciano, J. Carlos & Velasco, Carlos, 2006. "Generalized spectral tests for the martingale difference hypothesis," Journal of Econometrics, Elsevier, vol. 134(1), pages 151-185, September.
    14. Yongmiao Hong & Yoon-Jin Lee, 2005. "Generalized Spectral Tests for Conditional Mean Models in Time Series with Conditional Heteroscedasticity of Unknown Form," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(2), pages 499-541.
    15. Mohamed Amine Boutaba, 2009. "Dynamic linkages among European carbon markets," Economics Bulletin, AccessEcon, vol. 29(2), pages 499-511.
    16. Wright, Jonathan H, 2000. "Alternative Variance-Ratio Tests Using Ranks and Signs," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 1-9, January.
    17. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-273, April.
    18. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-858, May.
    19. Boemare, Catherine & Quirion, Philippe, 2002. "Implementing greenhouse gas trading in Europe: lessons from economic literature and international experiences," Ecological Economics, Elsevier, vol. 43(2-3), pages 213-230, December.
    20. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
    21. repec:dau:papers:123456789/4210 is not listed on IDEAS
    22. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    23. Kim, Jae H., 2006. "Wild bootstrapping variance ratio tests," Economics Letters, Elsevier, vol. 92(1), pages 38-43, July.
    24. Kling, Catherine & Rubin, Jonathan, 1997. "Bankable permits for the control of environmental pollution," Journal of Public Economics, Elsevier, vol. 64(1), pages 101-115, April.
    25. Belaire-Franch, Jorge & Opong, Kwaku K., 2005. "Some evidence of random walk behavior of Euro exchange rates using ranks and signs," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1631-1643, July.
    26. Roselyne Joyeux & George Milunovich, 2010. "Testing market efficiency in the EU carbon futures market," Applied Financial Economics, Taylor & Francis Journals, vol. 20(10), pages 803-809.
    27. Jensen, Michael C., 1978. "Some anomalous evidence regarding market efficiency," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 95-101.
    28. Bohringer, Christoph & Lange, Andreas, 2005. "On the design of optimal grandfathering schemes for emission allowances," European Economic Review, Elsevier, vol. 49(8), pages 2041-2055, November.
    29. Vesterdal, Morten & Svendsen, Gert Tinggaard, 2004. "How should greenhouse gas permits be allocated in the EU?," Energy Policy, Elsevier, vol. 32(8), pages 961-968, June.
    30. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    31. Chevallier, Julien, 2009. "Carbon futures and macroeconomic risk factors: A view from the EU ETS," Energy Economics, Elsevier, vol. 31(4), pages 614-625, July.
    32. Deo, Rohit S., 2000. "Spectral tests of the martingale hypothesis under conditional heteroscedasticity," Journal of Econometrics, Elsevier, vol. 99(2), pages 291-315, December.
    33. Amélie Charles & Olivier Darné, 2009. "Variance‐Ratio Tests Of Random Walk: An Overview," Journal of Economic Surveys, Wiley Blackwell, vol. 23(3), pages 503-527, July.
    34. Kuan Chung-Ming & Lee Wei-Ming, 2004. "A New Test of the Martingale Difference Hypothesis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(4), pages 1-26, December.
    35. Svendsen, Gert Tinggaard & Vesterdal, Morten, 2003. "How to design greenhouse gas trading in the EU?," Energy Policy, Elsevier, vol. 31(14), pages 1531-1539, November.
    36. Alberola, Emilie & Chevallier, Julien & Cheze, Benoi^t, 2008. "Price drivers and structural breaks in European carbon prices 2005-2007," Energy Policy, Elsevier, vol. 36(2), pages 787-797, February.
    37. Choi, In, 1999. "Testing the Random Walk Hypothesis for Real Exchange Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(3), pages 293-308, May-June.
    38. Yongmiao Hong & Tae-Hwy Lee, 2003. "Inference on Predictability of Foreign Exchange Rates via Generalized Spectrum and Nonlinear Time Series Models," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1048-1062, November.
    39. Maria Mansanet-Bataller & Angel Pardo & Enric Valor, 2007. "CO2 Prices, Energy and Weather," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 73-92.
    40. Szymon Borak & Wolfgang Härdle & Stefan Trück & Rafal Weron, 2006. "Convenience Yields for CO2 Emission Allowance Futures Contracts," SFB 649 Discussion Papers SFB649DP2006-076, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    41. Hoque, Hafiz A.A.B. & Kim, Jae H. & Pyun, Chong Soo, 2007. "A comparison of variance ratio tests of random walk: A case of Asian emerging stock markets," International Review of Economics & Finance, Elsevier, vol. 16(4), pages 488-502.
    42. Paolella, Marc S. & Taschini, Luca, 2008. "An econometric analysis of emission allowance prices," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2022-2032, October.
    43. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    44. Daskalakis, George & Psychoyios, Dimitris & Markellos, Raphael N., 2009. "Modeling CO2 emission allowance prices and derivatives: Evidence from the European trading scheme," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1230-1241, July.
    45. Kim, Jae H., 2009. "Automatic variance ratio test under conditional heteroskedasticity," Finance Research Letters, Elsevier, vol. 6(3), pages 179-185, September.
    46. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    47. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
    48. Ellerman, A. Denny & Buchner, Barbara K., 2006. "Over-Allocation or Abatement? A Preliminary Analysis of the Eu Ets Based on the 2005 Emissions Data," Climate Change Modelling and Policy Working Papers 12062, Fondazione Eni Enrico Mattei (FEEM).
    49. Fong, Wai Mun & Koh, Seng Kee & Ouliaris, Sam, 1997. "Joint Variance-Ratio Tests of the Martingale Hypothesis for Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 51-59, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sattarhoff, Cristina & Gronwald, Marc, 2022. "Measuring informational efficiency of the European carbon market — A quantitative evaluation of higher order dependence," International Review of Financial Analysis, Elsevier, vol. 84(C).
    2. Kristoufek, Ladislav & Vosvrda, Miloslav, 2013. "Measuring capital market efficiency: Global and local correlations structure," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(1), pages 184-193.
    3. 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.
    4. Carmen López-Martín & Sonia Benito Muela & Raquel Arguedas, 2021. "Efficiency in cryptocurrency markets: new evidence," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 11(3), pages 403-431, September.
    5. Zdeněk Hlávka & Marie Hušková & Claudia Kirch & Simos G. Meintanis, 2017. "Fourier--type tests involving martingale difference processes," Econometric Reviews, Taylor & Francis Journals, vol. 36(4), pages 468-492, April.
    6. Cristina Sattarhoff & Marc Gronwald, 2018. "How to Measure Financial Market Efficiency? A Multifractality-Based Quantitative Approach with an Application to the European Carbon Market," CESifo Working Paper Series 7102, CESifo.
    7. Eunyoung Kim & Youngcheul Ahn & Doojin Ryu, 2014. "Application of the Carbon Emission Pricing Model in the Korean Market," Energy & Environment, , vol. 25(1), pages 63-78, February.
    8. Zhang, Wei & Li, Jing & Li, Guoxiang & Guo, Shucen, 2020. "Emission reduction effect and carbon market efficiency of carbon emissions trading policy in China," Energy, Elsevier, vol. 196(C).
    9. Todea, Alexandru & Pleşoianu, Anita, 2013. "The influence of foreign portfolio investment on informational efficiency: Empirical evidence from Central and Eastern European stock markets," Economic Modelling, Elsevier, vol. 33(C), pages 34-41.
    10. Chau, Frankie & Kuo, Jing-Ming & Shi, Yukun, 2015. "Arbitrage opportunities and feedback trading in emissions and energy markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 130-147.
    11. Afees A. Salisu & Taofeek O. Ayinde, 2016. "Testing the Martingale Difference Hypothesis (MDH) with Structural Breaks: Evidence from Foreign Exchanges of Nigeria and South Africa," Journal of African Business, Taylor & Francis Journals, vol. 17(3), pages 342-359, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Amélie Charles & Olivier Darné & Jessica Fouilloux, 2010. "Testing the Martingale Difference Hypothesis in the EU ETS Markets for the CO2 Emission Allowances: Evidence from Phase I and Phase II," Post-Print hal-00797491, HAL.
    2. Charles, Amélie & Darné, Olivier & Kim, Jae H., 2012. "Exchange-rate return predictability and the adaptive markets hypothesis: Evidence from major foreign exchange rates," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1607-1626.
    3. Peter C. B. Phillips & Sainan Jin, 2014. "Testing the Martingale Hypothesis," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 32(4), pages 537-554, October.
    4. Amélie Charles & Olivier Darné, 2009. "Variance‐Ratio Tests Of Random Walk: An Overview," Journal of Economic Surveys, Wiley Blackwell, vol. 23(3), pages 503-527, July.
    5. Montagnoli, Alberto & de Vries, Frans P., 2010. "Carbon trading thickness and market efficiency," Energy Economics, Elsevier, vol. 32(6), pages 1331-1336, November.
    6. Xuexin WANG, 2021. "Generalized Spectral Tests for High Dimensional Multivariate Martingale Difference Hypotheses," Working Papers 2021-11-06, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    7. Stéphane Goutte & David Guerreiro & Bilel Sanhaji & Sophie Saglio & Julien Chevallier, 2019. "International Financial Markets," Post-Print halshs-02183053, HAL.
    8. Omid Sabbaghi & Navid Sabbaghi, 2017. "The Chicago Climate Exchange and market efficiency: an empirical analysis," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 19(4), pages 711-734, October.
    9. Cretí, Anna & Joëts, Marc, 2017. "Multiple bubbles in the European Union Emission Trading Scheme," Energy Policy, Elsevier, vol. 107(C), pages 119-130.
    10. Amelie Charles & Olivier Darne, 2009. "Testing for Random Walk Behavior in Euro Exchange Rates," Economie Internationale, CEPII research center, issue 119, pages 25-45.
    11. Charles, Amélie & Darné, Olivier, 2009. "The efficiency of the crude oil markets: Evidence from variance ratio tests," Energy Policy, Elsevier, vol. 37(11), pages 4267-4272, November.
    12. Boya, Christophe M., 2019. "From efficient markets to adaptive markets: Evidence from the French stock exchange," Research in International Business and Finance, Elsevier, vol. 49(C), pages 156-165.
    13. Bernard Njindan Iyke, 2019. "A Test Of The Efficiency Of The Foreign Exchange Market In Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 0(12th BMEB), pages 1-26, January.
    14. Charles, Amélie & Darné, Olivier, 2009. "The random walk hypothesis for Chinese stock markets: Evidence from variance ratio tests," Economic Systems, Elsevier, vol. 33(2), pages 117-126, June.
    15. Al-Khazali, Osamah M. & Pyun, Chong Soo & Kim, Daewon, 2012. "Are exchange rate movements predictable in Asia-Pacific markets? Evidence of random walk and martingale difference processes," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 221-231.
    16. Katusiime, Lorna & Shamsuddin, Abul & Agbola, Frank W., 2015. "Foreign exchange market efficiency and profitability of trading rules: Evidence from a developing country," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 315-332.
    17. Zdeněk Hlávka & Marie Hušková & Claudia Kirch & Simos G. Meintanis, 2017. "Fourier--type tests involving martingale difference processes," Econometric Reviews, Taylor & Francis Journals, vol. 36(4), pages 468-492, April.
    18. Aye, Goodness C. & Gil-Alana, Luis A. & Gupta, Rangan & Wohar, Mark E., 2017. "The efficiency of the art market: Evidence from variance ratio tests, linear and nonlinear fractional integration approaches," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 283-294.
    19. Kim, Jae H. & Shamsuddin, Abul, 2008. "Are Asian stock markets efficient? Evidence from new multiple variance ratio tests," Journal of Empirical Finance, Elsevier, vol. 15(3), pages 518-532, June.
    20. Cong, Ren & Lo, Alex Y., 2017. "Emission trading and carbon market performance in Shenzhen, China," Applied Energy, Elsevier, vol. 193(C), pages 414-425.

    More about this item

    Keywords

    CO2 emission allowances; Market efficiency; Martingale difference hypothesis;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:28:y:2011:i:1:p:27-35. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.