The potential benefits of tradable pollution permits and allowances can be limited by transaction costs.The implementation and operation of the European Union Emission Trading Scheme (EU ETS) involves transaction costs such as internal costs, capital costs, and consultancy and trading costs.This paper investigates the effect of transaction costs on market efficiency and price discovery in the EU ETS.An empirical assessment of nonlinear mean reversion is provided using threshold cointegration, which allows for asymmetric regimedependent adjustment to the equilibrium relationship between European Union Emission Allowances (EUA) spot and futures prices.The mean reversion process reveals nonlinear and regime-dependent adjustment, and thus the empirical evidence indicates that transaction costs affect the mean reversion behavior and restrain market efficiency and price discovery.
|Number of pages||16|
|Journal||Hitotsubashi Journal of Economics|
|Publication status||Published - 2015 Dec|
Bibliographical notePublisher Copyright:
© Hitotsubashi University.
- EU ETS
- Market efficiency
- Nonlinear mean reversion
- Price discovery
- Threshold cointegration
- Transaction costs
ASJC Scopus subject areas
- Business, Management and Accounting(all)
- Economics and Econometrics