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

Iordanis Kalaitzoglou, Boulis Maher Ibrahim

    Research output: Contribution to journalArticlepeer-review

    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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