Assessing price clustering in European Carbon Markets

The presence of price clustering in markets is taken as a sign of market inefficiency that can influence trading strategies. In this paper, we study the presence of a concentration in prices in carbon futures markets. Specifically, we analyze the European Carbon Futures Markets and test for evidence of preference for certain prices above others. Our results reveal the strong presence of price clustering in the carbon market at prices ending in digits 0 and 5. These findings support the attraction hypothesis, which endorses a significant clustering on gravitational prices, but also backs the negotiation hypothesis, which advocates greater clustering when trading costs are higher.

► We study price clustering in European Carbon Markets.
► Prices are concentrated in transaction prices ending in digits 0 and 5.
► Concentration in prices is greater when less market information is available.
► Price clustering is greater when trading costs are higher.