Price Discovery, Causality and Volatility Spillovers in European Union Allowances Phase II: A High Frequency Analysis

This paper deals with the modeling of the relationship of European Union Al-lowance spot- and futures-prices within the second commitment period of the Eu-ropean Union Emission Trading Scheme. Based on high frequency data, we analyzecausality in the ¯rst and the second conditional moments. To reveal long run pricediscovery we compute the common factor weights proposed by Schwarz and Sza-kmary (1994) and the information share proposed by Hasbrouck (1995) based onthe estimated coe±cients of a vector error correction model. To analyze the shortrun dynamics we perform Granger causalty tests. The GARCH-BEKK model intro-duced by Engle and Kroner (1995) is employed to analyze the volatility transmissionstructure. We identify the futures market to be the leader of the long run price dis-covery process whereas a bidirectional short run causality structure is observed.Furthermore we detect unidirectional volatility transmission from the futures to thespot market at highest frequencies.[...]