Price discovery in carbon exchange traded fund markets

Abstract

In this study, we analyze the price discovery in four carbon exchange-traded funds (ETF) markets: (i) VanEck Low Carbon Energy ETF (Vaneck), (ii) iShares MSCI ACWI Low Carbon Target ETF (iShare), (iii) SPDR MCSI ACWI Climate Paris Aligned ETF (SPDR), and (iv) Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF (Xtrackers) using daily closing prices of the four carbon ETFs from December 6, 2018, to November 30, 2022. All four ETF prices are found to have a single unit root implying the efficiency of these ETF markets (LeRoy 1989). However, Johansen's (1991) cointegration test reveals that these four ETFs are driven by not one but three common stochastic trends. Further Analysis reveals that iShares and SPDR markets are driven by the same market force (common stochastic trend). Based on the generalized information share (GIS), we find that approximately 57.89% and 42.11% of the price discovery occurs in the iShares and SPDR markets, respectively. We further analyze the impact of the COVID-19 pandemic by dividing the whole sample into pre-COVID and COVID subsamples. In the pre-COVID period, the GIS measures for the iShares and SPDR are 88.69% and 11.31%, respectively. However, GIS measures for the iShares and SPDR are 1.04% and 98.96%, respectively, in the COVID period indicating a significant impact of COVID-19 on price discovery.