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Limit order books, uninformed traders and commodity derivatives: Insights from the European carbon futures

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  • Rannou, Yves

Abstract

This paper provides a suitable model for studying the strategic behavior of uninformed investors that trade commodity derivatives via limit order books. Two main testable implications are obtained after solving for the model equilibrium. The adverse selection costs of uninformed traders depend on the inflow of market orders and their risk aversion. Next, the adverse selection costs of uninformed buyers and sellers and the difference of their asset valuations determine the size of their bid-ask spread.

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  • Rannou, Yves, 2019. "Limit order books, uninformed traders and commodity derivatives: Insights from the European carbon futures," Economic Modelling, Elsevier, vol. 81(C), pages 387-410.
    • Handle: RePEc:eee:ecmode:v:81:y:2019:i:c:p:387-410
    DOI: 10.1016/j.econmod.2019.07.009
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    Cited by:

    1. Ren, Xiaohang & Li, Yiying & Qi, Yinshu & Duan, Kun, 2022. "Asymmetric effects of decomposed oil-price shocks on the EU carbon market dynamics," Energy, Elsevier, vol. 254(PB).
    2. Ren, Xiaohang & Li, Yiying & yan, Cheng & Wen, Fenghua & Lu, Zudi, 2022. "The interrelationship between the carbon market and the green bonds market: Evidence from wavelet quantile-on-quantile method," Technological Forecasting and Social Change, Elsevier, vol. 179(C).
    3. Yves Rannou & Pascal Barneto & Mohamed Amine Boutabba, 2020. "Green Bond market vs. Carbon market in Europe : Two different trajectories but some complementarities," Working Papers hal-02981422, HAL.

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    More about this item

    Keywords

    Market microstructure; Limit order book; Uninformed traders; Bid-ask spread; European carbon futures;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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