Arbitrage opportunities and feedback trading in emissions and energy markets

Chau, Frankie, Kuo, Jing-Ming and Shi, Yukun (2015) Arbitrage opportunities and feedback trading in emissions and energy markets. Journal of International Financial Markets, Institutions & Money, 36 . pp. 130-147. ISSN 1042-4431 (doi:10.1016/j.intfin.2015.02.002)

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Abstract

This paper extends Sentana and Wadhwani (SW 1992) model to study the presence of feedback trading in emissions and energy markets and the extent to which such behaviour is linked to the level of arbitrage opportunities. Applying our augmented models to the carbon emission and major energy markets in Europe, we find evidence of feedback trading in coal and electricity markets, but not in carbon market where the institutional investors dominate. This finding is consistent with the notion that institutional investors are less susceptible to pursuing feedback-style investment strategies. In further analysis, our results show that the intensity of feedback trading is significantly related to the level of arbitrage opportunities, and that the significance of such relationship depends on the market regimes.

Item Type: Article
Additional Information: Available online 9 February 2015
Keywords (uncontrolled): Feedback trading; Arbitrage opportunities; Emissions and energy markets; Conditional volatility
Research Areas: A. > Business School > Accounting and Finance
Item ID: 14572
Notes on copyright: From SHERPA/RoMEO: Author's post-print on open access repository after an embargo period of 36 months
Depositing User: Yukun Shi
Date Deposited: 20 Apr 2015 16:26
Last Modified: 01 Jun 2019 06:54
URI: https://eprints.mdx.ac.uk/id/eprint/14572

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