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Ambiguity in markets: A test in an Australian emissions market

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Abstract

Research suggests that ambiguity not only reduces the desirability to trade but also the overall effectiveness of financial markets. This paper tests the hypothesis that information related to climate change mitigation in Australia reduces the ambiguity surrounding investor participation in Australia’s largest emissions trading scheme. This market was chosen due to the high level of ambiguity surrounding government policy and the ability to determine the factors likely to reduce ambiguity. We use government announcements and international and locally significant events as sources of information. From this we find that information does reduce the level of ambiguity, as shown by reduced bid-ask spreads and increased relative trading volume.

Suggested Citation

  • Deborah Cotton & David Michayluk, 2014. "Ambiguity in markets: A test in an Australian emissions market," Published Paper Series 2014-1, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:ppaper:2014-1
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    Keywords

    Ambiguity; Market efficiency; Emissions Trading;

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