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The Market Microstructure of the European Climate Exchange

  • Yoichi Otsubo

    ()

  • Bruce Mizrach

    (LSF)

This 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. 2009 Trading volumes total ?22 billion and are growing, with EUA transactions doubling, and CER volume up 61%. Spreads range from ?0:02 to ?0:06 for EUA and from ?0:07 to ?0:18 for CER. Market impact estimates imply that an average trade will move the EUA market by 1.08 euro centimes and the CER market 4.29. 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. "Keywords:""Keywords: carbon; market microstructure; bid-ask spread; information share; order imbalance"""

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Paper provided by Luxembourg School of Finance, University of Luxembourg in its series LSF Research Working Paper Series with number 12-7.

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Date of creation: 2012
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Handle: RePEc:crf:wpaper:12-7
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