Market efficiency and the basis in the European Union Emissions Trading Scheme New evidence from non linear mean reverting unit root tests

Market efficiency and the basis in the European Union Emissions Trading Scheme New evidence from... 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Studies Emerald Publishing

Market efficiency and the basis in the European Union Emissions Trading Scheme New evidence from non linear mean reverting unit root tests

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Publisher
Emerald Publishing
Copyright
Copyright © 2014 Emerald Group Publishing Limited. All rights reserved.
ISSN
0144-3585
DOI
10.1108/JES-08-2012-0120
Publisher site
See Article on Publisher Site

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.

Journal

Journal of Economic StudiesEmerald Publishing

Published: Jul 8, 2014

Keywords: Emissions trading; Basis; ESTAR models

References

  • Are the European carbon markets efficient
    Daskalakis, G.; Markellos, R.N.
  • Liquidity and the law of one price: the case of the futures‐cash basis
    Roll, R.; Schwartz, E.; Subrahmanym, A.

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