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Why do carbon prices and price volatility change?

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  • Ibrahim, Boulis Maher
  • Kalaitzoglou, Iordanis Angelos

Abstract

An asymmetric information microstructural pricing model is proposed in which price responses to information and liquidity vary with every transaction. bid-ask quotes and price components account for learning by incorporating changing expectations of the rate of transacted volume (trading intensity) and the risk level of incoming trades. Analysis of European carbon futures transactions finds expected trading intensity to simultaneously increase the information component and decrease the liquidity component of price changes, but at different rates. This explains some conflicting results in prior literature. Further, the expected persistence in trading intensity explains the majority of the autocorrelations in the level and the conditional variance of price change; helps predict hourly patterns in returns, variance and the bid-ask spread; and differentiates the price impact of buy versus sell and continuing versus reversing trades.

Suggested Citation

  • Ibrahim, Boulis Maher & Kalaitzoglou, Iordanis Angelos, 2016. "Why do carbon prices and price volatility change?," Journal of Banking & Finance, Elsevier, vol. 63(C), pages 76-94.
  • Handle: RePEc:eee:jbfina:v:63:y:2016:i:c:p:76-94
    DOI: 10.1016/j.jbankfin.2015.11.004
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:eneeco:v:67:y:2017:i:c:p:213-223 is not listed on IDEAS
    2. Tan, Xue-Ping & Wang, Xin-Yu, 2017. "Dependence changes between the carbon price and its fundamentals: A quantile regression approach," Applied Energy, Elsevier, vol. 190(C), pages 306-325.

    More about this item

    Keywords

    CO2 emission allowances; Market microstructure; Duration; Liquidity; Price discovery;

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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