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Cleaning the carbon market! Market transparency and market efficiency in the EU ETS

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  • Iordanis Angelos Kalaitzoglou

    (Audencia Business School, (Ma)Rkets, (Te)Chnology and (S)Ociety Research Center)

Abstract

This paper revisits the informational efficiency of the EU ETS at a micro level, by introducing a novel time variant structural decomposition of variance. The new modelling introduces GARCH-like effects into a structural price modelling. With this, all variance components, including public information and price discreteness, can be estimated, for the first time, in a continuously updated setup that is free of sampling bias. The empirical findings report that although all variance components decrease in magnitude, this is primarily due to higher overall market liquidity that results in less price discovery per trade. On a proportional basis, though, the EU ETS appears to be increasingly inefficient prior to the introduction of MiFID II rules, with the situation reversing after their implementation. This is evidence that transparency is vital in rendering emission allowances a policy rather than a speculative instrument.

Suggested Citation

  • Iordanis Angelos Kalaitzoglou, 2025. "Cleaning the carbon market! Market transparency and market efficiency in the EU ETS," Annals of Operations Research, Springer, vol. 347(1), pages 501-533, April.
    • Handle: RePEc:spr:annopr:v:347:y:2025:i:1:d:10.1007_s10479-024-06032-2
    DOI: 10.1007/s10479-024-06032-2
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    More about this item

    Keywords

    EU ETS; Market Efficiency; Transparency; Variance Decomposition;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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