Transaction costs and nonlinear mean reversion in the EU emission trading scheme

Jeonghyun Kim, Byeongseon Seo

Research output: Contribution to journalArticle

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Abstract

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.

Original languageEnglish
Pages (from-to)281-296
Number of pages16
JournalHitotsubashi Journal of Economics
Volume56
Issue number2
Publication statusPublished - 2015 Dec 1

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Keywords

  • EU ETS
  • Market efficiency
  • Nonlinear mean reversion
  • Price discovery
  • Threshold cointegration
  • Transaction costs

ASJC Scopus subject areas

  • Economics and Econometrics
  • Business, Management and Accounting(all)

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