Impact of allowance submissions in European carbon emission markets

Philip, D.; Shi, Y.

Abstract

This paper studies the impact of the April allowance submissions mandate under the European Union emission trading scheme (EU ETS) in carbon emission markets. Using intraday order flow data, we test for the cross-market efficiency of spot-futures dynamics and find that the equilibrium level, adjustment speed and no-arbitrage boundaries of the spot and futures relationship shift subsequent to the submission date. In addition, our results show that the allowance submissions affect the price discovery process, with the carbon spot market providing stronger price leadership in the periods before the submission date and the futures market playing the predominant informational role thereafter. Using the heterogeneous autoregressive realized volatility (HAR-RV) model, we also find a change in volatility spillovers before the submission date, particularly from the spot to the futures market. Overall, the results suggest that the April allowance submissions have significant impact on the time series dynamics of spot and futures carbon emission markets.

Citation

Philip, D., & Shi, Y. (2015). Impact of allowance submissions in European carbon emission markets. International Review of Financial Analysis, 40, 27-37. https://doi.org/10.1016/j.irfa.2015.05.004

• Journal Article Type: Article
• Acceptance Date: May 13, 2015
• Publication Date: Jul 1, 2015
• Deposit Date: May 13, 2015
• Publicly Available Date: Nov 27, 2016
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Electronic ISSN: 1873-8079
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 40
• Pages: 27-37
• DOI: https://doi.org/10.1016/j.irfa.2015.05.004
• Keywords: Carbon allowance submission, Carbon emission markets, EU ETS, Mispricing, Price discovery, Volatility spillovers.
• Public URL: https://durham-repository.worktribe.com/output/1429264