Price Discovery and Trading after Hours: New Evidence from the World’s Largest Carbon Exchange

Abstract

We investigate the impact of after-hours trading on magnitude and timing of price discovery over the close-to-close period on the world’s largest carbon trading platform, the European Climate Exchange (ECX). Low-volume trading in carbon financial instruments can lead to relatively high levels of price discovery, but the generated pricing has low efficiency levels. This is associated with high levels of informed trades and low levels of liquidity trades. Our results show higher trading volume per minute and greater price efficiency for after hours when compared with regular trading hours. As a result of a higher proportion of informed trades, adverse selection costs for trades after hours are significantly larger than those for trades during the regular trading day.