Weak-form efficiency of European Union emission trading scheme – evidence from variance ratio tests

In this paper, we applied single period and multiple period variance ratio (VR) tests to European Union allowance (EUA) spot and futures data since their availability in June 2005 and April 2005 respectively up to the end of January 2010. Comparing Phase 1 (2005-2007) and Phase 2 (2008-2012), we find that the products traded in Phase 2 show weaker rejection against the random walk hypothesis than the products traded in Phase 1. We further divide the two phases into four sub periods, 2005/06/24 for spots and 2005/04/25 for futures to 2006/04/26, 2006/04/27 to 2007/12/31 as Phase 1, 2008/02/26 for spots and 2008/01/03 for futures to 2008/12/15 and 2008/12/16 to 2010/01/28 as Phase 2. It is revealed that even the products traded in the later stage in Phase 1 after the price adjustment on 26th April 2006 showed much weaker rejection than the primary stage of the market. Thus, it is proven that the market efficiency is improving from Phase 1 to Phase 2 and the market has turned more efficient after the adjustment on 26th April 2006.