A Microstructure Analysis of the Carbon Finance Market

53 Pages Posted: 1 Aug 2011 Last revised: 1 Jun 2013

See all articles by Don Bredin

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance

Stuart Hyde

Alliance Manchester Business School - University of Manchester

Cal B. Muckley

University College Dublin

Date Written: January 8, 2013

Abstract

The European Union Emissions Trading Scheme is the key policy instrument of the European Commission's Climate Change Program aimed at reducing greenhouse gas emissions to eight percent below 1990 levels by 2012. The key asset traded under the scheme is the European Union allowance (EUA). This article examines ultra high frequency data to assess the extent of the development in the futures market of the EU Emissions Trading Scheme. Our results indicate significant developments consistent with sequential information arrival. They also indicate a negative contemporaneous relationship between volume and volatility for all contracts. The implication is that liquidity traders dominate any role played by informed traders. Incorporating the duration between trades in our analysis has significant impact suggesting that any empirical investigation of the intra-day volume-volatility relationship needs to actively account for the impact of time elapse between trades.

Keywords: CO2 emissions allowances, Futures, Emissions trading, Energy, Kyoto Protocol, Market microstructure

JEL Classification: G13, G14, G19

Suggested Citation

Bredin, Don and Hyde, Stuart and Muckley, Cal B., A Microstructure Analysis of the Carbon Finance Market (January 8, 2013). Available at SSRN: https://ssrn.com/abstract=1899227 or http://dx.doi.org/10.2139/ssrn.1899227

Don Bredin (Contact Author)

University College Dublin (UCD) - Department of Banking & Finance ( email )

School of Business
Blackrock, Co. Dublin, 4
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff_bredin.html

Stuart Hyde

Alliance Manchester Business School - University of Manchester ( email )

Booth Street West
Mezzanine Floor, Crawford House
Manchester M15 6PB
United Kingdom
44 (0) 161 275 4017 (Phone)
44 (0) 161 275 4023 (Fax)

Cal B. Muckley

University College Dublin ( email )

Blackrock, Co. Dublin
Ireland
+353-1-716-8091 (Phone)

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