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Market efficiency and the basis in the European Union Emissions Trading Scheme

Author

Listed:
  • Andros Gregoriou
  • Jerome Healy
  • Nicola Savvides

Abstract

Purpose - – The purpose of this paper is to investigate the validity of the cost of carry model by examining the time series properties of the deviation between future and spot prices in the European Union Emissions Trading Scheme (EU-ETS) over the time period 2005-2012. The paper utilizes a non-linear mean reverting adjustment mechanism, and discovers that although deviations of future from spot prices can exhibit a region of non-stationary behaviour, overall they are stationary indicating market efficiency in the trading of carbon permits. Design/methodology/approach - – The methodology involves non-linear mean reverting unit root tests. Findings - – The findings provide insights into the functioning of the EU-ETS market. They suggest that it is informationally efficient and does not permit arbitrage between spots and futures. Originality/value - – The authors are the first study to examine efficiency in the EU-ETS by investigating the validity of the cost of carry model. The authors are also the only study to look at efficiency in both Phase I and Phase II of the scheme.

Suggested Citation

  • Andros Gregoriou & Jerome Healy & Nicola Savvides, 2014. "Market efficiency and the basis in the European Union Emissions Trading Scheme," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 41(4), pages 615-628, July.
    • Handle: RePEc:eme:jespps:v:41:y:2014:i:4:p:615-628
    DOI: 10.1108/JES-08-2012-0120
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    Citations

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    Cited by:

    1. Mohsen Bahmani‐Oskooee & Niloy Bose & Yun Zhang, 2019. "An asymmetric analysis of the J‐curve effect in the commodity trade between China and the US," The World Economy, Wiley Blackwell, vol. 42(10), pages 2854-2899, October.
    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. Aline Souza Magalhaes & Terciane Carvalho, 2018. "Policies For Reduction Of Greenhouse Gases Emission And Their Costs And Opportunities For The Brazilian Industry," Anais do XLIV Encontro Nacional de Economia [Proceedings of the 44th Brazilian Economics Meeting] 183, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    4. Bahmani-Oskooee Mohsen & Harvey Hanafiah, 2017. "The Asymmetric Effects of Exchange Rate Changes on the Trade Balance of Singapore," Global Economy Journal, De Gruyter, vol. 17(4), pages 1-11, December.
    5. Mohsen Bahmani-Oskooee & Niloy Bose & Yun Zhang, 2018. "Asymmetric Cointegration, Nonlinear ARDL, and the J-Curve: A Bilateral Analysis of China and Its 21 Trading Partners," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(13), pages 3131-3151, October.

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