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The Market Microstructure of the European Climate Exchange

  • Bruce Mizrach

    ()

    (Rutgers University)

  • Yoichi Otsubo

    ()

    (Rutgers University)

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. 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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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 201005.

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Length: 20 pages
Date of creation: 03 Jul 2010
Date of revision:
Handle: RePEc:rut:rutres:201005
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