Does order flow in the European carbon allowances market reveal information?

Iordanis Kalaitzoglou, Boulis Maher Ibrahim

Research output: Contribution to journalArticle

23 Citations (Scopus)

Abstract

This paper analyses trading behaviour during the development period of the European Carbon Futures Market. Duration between transactions is modelled with a smooth transition mixture of Weibull autocorrelated duration (STM ACD) specification with a threshold transition governed by trading intensity as an observable variable captured by duration weighted volume. The three regime specification is motivated by three behavioural trading patterns: informed trading characterised by high intensity, uninformed or non-discretionary liquidity trades which arrive randomly and fundamental or discretionary liquidity trades which have lagged behaviour. The empirical analyses documents parameter values of the STM ACD model that are in line with the hypothesized values implied by theory which is supportive of the notion that the market is characterised by three different groups of traders. There is evidence that OTC trades are distinct to regular trades and the analyses shows that the smoothness parameter which
capture the speed of learning changes from Phase I to Phase II suggesting that
fundamental traders learn or react faster during Phase II which may be indicative of enhanced market transparency and increased market maturity.
Original languageEnglish
Pages (from-to)604-635
Number of pages32
JournalJournal of Financial Markets
Volume16
Issue number3
Early online date1 Dec 2012
DOIs
Publication statusPublished - Aug 2013

Keywords

  • Carbon market
  • Microstructure
  • Duration model
  • Ultra-high-frequency data
  • AUTOREGRESSIVE CONDITIONAL DURATION
  • ECONOMETRIC-ANALYSIS
  • SECURITIES MARKETS
  • PRICE ADJUSTMENT
  • TRANSACTION DATA
  • TRADE
  • MODELS
  • TIME

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