Time-Varying Intraday Causality between European Carbon Spot and Futures Prices

This study examines the spot-futures nexus during Phase IV of the EU-ETS, using a novel time-varying Granger causality test on intraday high-frequency data.The results show that the causality largely runs from carbon futures to spot market.The findings indicate that carbon futures prices reflect the information faster, predominately leading the price formation process, possibly due to higher liquidity and trading volume in the ECX futures market, enhancing its informational content over time.These findings have significant implications for portfolio management.Also, the findings may help policymakers to improve the market microstructure of the EU-ETS and similar carbon markets.