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Trading Patterns in the European Carbon Market: The Role of Trading Intensity and OTC Transaction

Author

Listed:
  • Iordanis Kalaitzoglou

    (Audencia Recherche - Audencia Business School)

  • Boulis Maher Ibrahim

    (HWU - Heriot-Watt University [Edinburgh])

Abstract

This paper examines the effect of trading intensity and OTC transactions on expected market conditions in the early development period of the European Carbon futures market. Past duration and trading intensity are used as information related order flow variables in modelling time between transactions in two new specifications of Autocorrelation Conditional Duration (ACD) models. This allows for specific investigation of non-linear asymmetric effects on expected duration and the impact of OTC transactions. All recorded transactions of the most heavily traded December 2008 futures contract occurring during Phase I (2005-2007) and the first year of Phase II (2008) in the two largest exchanges (ECX and Nord Pool) of the European Carbon Market are investigated. Evidence is presented of two main types of trading episodes of increased and decreased trading intensity. Both have a significant impact on price volatility which increases further if an OTC transaction intrudes. OTC transactions also play a dual role. They slow down trading activity in the short term (over the next five transactions) but increase it substantially in the long term (over ten transactions). Both their transitory and permanent price impact components increase, but the permanent impact is greater. Price volatility calms down faster than liquidity effects following an OTC trade, and this is more pronounced in ECX and in Phase II. The combined evidence also points to increased market depth, efficiency and maturity of the trading environment.

Suggested Citation

  • Iordanis Kalaitzoglou & Boulis Maher Ibrahim, 2013. "Trading Patterns in the European Carbon Market: The Role of Trading Intensity and OTC Transaction," Post-Print hal-00859268, HAL.
    • Handle: RePEc:hal:journl:hal-00859268
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    Citations

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    Cited by:

    1. Zhou, Xinxing & Gao, Yan & Wang, Ping & Zhu, Bangzhu & Wu, Zhanchi, 2022. "Does herding behavior exist in China's carbon markets?," Applied Energy, Elsevier, vol. 308(C).
    2. Rannou, Yves & Barneto, Pascal, 2016. "Futures trading with information asymmetry and OTC predominance: Another look at the volume/volatility relations in the European carbon markets," Energy Economics, Elsevier, vol. 53(C), pages 159-174.
    3. Kalaitzoglou, Iordanis Angelos & Ibrahim, Boulis Maher, 2015. "Liquidity and resolution of uncertainty in the European carbon futures market," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 89-102.
    4. 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.
    5. Chuan Li & Liangrong Song, 2022. "Regional Differences and Spatial Convergence of Green Development in China," Sustainability, MDPI, vol. 14(14), pages 1-16, July.
    6. Yigang Wei & Yan Li & Julien Chevallier & Michal Wojewodzki, 2024. "The Efficiency of China’s Carbon Trading Schemes: A Tale of Seven Pilot Markets," Commodities, MDPI, vol. 3(3), pages 1-21, August.
    7. Florina BRAN & Ildiko IOAN & Carmen Valentina RADULESCU, 2014. "Low Entropy: Creating Physical Basis For Economic Value By Environmental Policy Tools," EcoForum, "Stefan cel Mare" University of Suceava, Romania, Faculty of Economics and Public Administration - Economy, Business Administration and Tourism Department., vol. 3(2), pages 1-3, July.
    8. Iordanis Angelos Kalaitzoglou & Boulis Maher Ibrahim, 2015. "Liquidity and resolution of uncertainty in the European carbon futures market," Post-Print hal-01107956, HAL.
    9. Tengda Lu & Xieer Dai & Jun Chen & Ming Dai, 2018. "Pricing Industrial Discharge Quota (IDQ): A Model Reflecting Opportunity Cost of Performing Ecological Responsibility," Sustainability, MDPI, vol. 10(6), pages 1-20, June.

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