Liquidity and transaction costs in the European carbon futures market

Abstract

This article is the first to examine liquidity and transaction costs in the European carbon futures market. Results indica te a dramatic improvement in liquidity and a subsequent reduction in transaction costs since carbon futures began trading in 2005. On-market liquidity gravitates to December expiry month contracts, coinciding with annual emissions audit requirements. Results also document a widening of the bid-ask spread in response to information asymmetry, and provide evidence of a permanent price effect following medium and large trades. © 2010 Macmillan Publishers Ltd.