Overreaction and Market Efficiency in EU Carbon Futures: Evidence from Extreme Return Events

This dissertation examines whether extreme daily movements in European Union Allowance (EUA) futures are followed by predictable short-term abnormal returns. The main objective is to assess whether large price shocks in the EU carbon market generate post-event reversals consistent with behavioural overreaction, or whether they reflect efficient price adjustment. This question is relevant because EUA futures are shaped by energy-market fundamentals, macro-financial conditions, regulatory design, and expectations about future allowance scarcity. The analysis uses daily EUA futures data from January 2008 to March 2026, covering Phase II, Phase III, and the early years of Phase IV of the European Union Emissions Trading System. Extreme events are identified using volatility-scaled returns defined relative to a rolling volatility window, and abnormal returns are estimated through an event-specific factor model controlling for natural gas returns, euro-denominated coal returns, STOXX Europe 600 returns, and changes in the German ten-year Bund yield. Cumulative abnormal returns are examined over one-, three-, and five-day post-event windows. The findings do not provide robust evidence of statistically significant post-event abnormal returns. CARs remain small and statistically indistinguishable from zero across the full sample and when positive and negative shocks are analysed separately. Additional tests provide little support for asymmetric responses or phase-dependent overreaction. Robustness checks using alternative event definitions, a mean-adjusted benchmark, winsorised controls, alternative estimation windows, non-parametric tests, and bootstrap confidence intervals confirm the baseline results. Overall, the evidence does not support the overreaction hypothesis. Extreme EUA futures movements do not generate predictable short-term reversal patterns or reliable abnormal-return opportunities. The results are more consistent with rapid short-horizon information incorporation in the EUA futures market.