Analysis of the Informational Efficiency of the EU Carbon Emission Trading Market: Asymmetric MF-DFA Approach

Abstract

This study explores the degree and change of informational efficiency of the European Union (EU) carbon emission trading market using an asymmetric multifractal detrended fluctuation analysis (A-MF-DFA) method, which allows asymmetry. For this purpose, we analysed the daily price series of the European Emissions Market, which is operated according to the European Union Emissions Trading Scheme. This carbon market is the most active and has the largest trading volume. The data covers the period (from 4 August 2005 to 31 December 2019). The main results are summarised as follows. First, there is a multifractal feature in the price return movements of the EU carbon trading market, which behaves differently in the upward and downward periods of the market. Second, the informational efficiency of the carbon emission market has changed over time, with Phase I having the lowest informational efficiency and Phase III having the highest informational efficiency. These results indicate that informational efficiency has increased as the carbon emission market matures. Third, from the result of the market deficiency measure (MDM), Phase I showed the lowest market efficiency, whereas Phase III showed the highest efficiency. During Phase III, the MDM values of the upward period were higher than that of the downward period, implying higher market inefficiency during the upward period.