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Carbon Financial Instruments, thin trading, and volatility: Evidence from the Chicago Climate Exchange

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  • Sabbaghi, Omid
  • Sabbaghi, Navid

Abstract

We provide the first econometric investigation of volatility dynamics for the Carbon Financial Instrument (CFI) traded on the Chicago Climate Exchange (CCX). A CFI is a financial contract with the right to emit 100 metric tons of CO2 equivalent. In this study, we present evidence of infrequent trading in the CCX, consistent with emerging markets that are inhabited by non-competitive agents trading permits. We explore the relationship between the observed thin trading effects and GARCH model testing and estimation, concluding with some implications for volatility-based Value-at-Risk forecasts. Our results are important for traders of Carbon Financial Instruments and for policy makers seeking to improve the design of the Chicago Climate Exchange.

Suggested Citation

  • Sabbaghi, Omid & Sabbaghi, Navid, 2011. "Carbon Financial Instruments, thin trading, and volatility: Evidence from the Chicago Climate Exchange," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(4), pages 399-407.
    • Handle: RePEc:eee:quaeco:v:51:y:2011:i:4:p:399-407
    DOI: 10.1016/j.qref.2011.07.004
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    More about this item

    Keywords

    Volatility; Trading volume; Chicago Climate Exchange; Carbon Financial Instrument; Sustainability;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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