Liquidity and market efficiency in the world's largest carbon market

Gbenga Ibikunle, Andros Gregoriou, Andreas Hoepner, Mark Rhodes

Research output: Contribution to journalArticlepeer-review


We investigate liquidity and market efficiency on the world's largest carbon exchange,IntercontinentalExchange Inc.’s European Climate Exchange (ECX), by using intraday short-horizon return predictability as an inverse indicator of market efficiency. We find a strong relationship between liquidity and market efficiency such that when spreads narrow, return predictability diminishes. This is more pronounced for the highest trading carbon futures and during periods of low liquidity. Since the start of trading in Phase II of the EU Emissions Trading Scheme (EU-ETS) prices have continuously moved nearer to unity with efficient, random walk benchmarks, and this improves from year to year. Overall, our findings suggest that trading quality in the EU-ETS has improved markedly and matures over the 2008–2011 compliance years.
Original languageEnglish
Pages (from-to)431-447
Number of pages17
JournalBritish accounting review
Issue number4
Publication statusPublished - 27 Nov 2015

Bibliographical note

© 2015. This manuscript version is made available under the CC-BY-NC-ND 4.0 license


  • Liquidity
  • Order flow
  • Market efficiency
  • Return predictability
  • European climate exchange
  • EU Emissions Trading Scheme (EU-ETS)
  • Carbon futures


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