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.
- CO2 emission allowances
- Market microstructure
- price discovery
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
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- School of Social Sciences, Edinburgh Business School - Associate Professor
- School of Social Sciences - Associate Professor
- Research Centres and Themes, Energy Academy - Associate Professor
- Research Centres and Themes, Centre for Finance & Investment - Associate Professor
- Research Centres and Themes, The Spatial Economics and Econometrics Centre - Associate Professor
Person: Academic (Research & Teaching)