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Arbitrage opportunities and feedback trading in emissions and energy markets

Chau, F.; Kuo, J.; Shi, Y.

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Authors

J. Kuo

Y. Shi



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.

Citation

Chau, F., Kuo, J., & Shi, Y. (2015). Arbitrage opportunities and feedback trading in emissions and energy markets. Journal of International Financial Markets, Institutions and Money, 36, 130-147. https://doi.org/10.1016/j.intfin.2015.02.002

Journal Article Type Article
Acceptance Date Feb 2, 2015
Online Publication Date Feb 9, 2015
Publication Date May 1, 2015
Deposit Date Feb 4, 2015
Publicly Available Date Feb 10, 2015
Journal Journal of International Financial Markets, Institutions and Money
Print ISSN 1042-4431
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 36
Pages 130-147
DOI https://doi.org/10.1016/j.intfin.2015.02.002
Keywords Feedback trading, Arbitrage opportunities, Emissions and energy markets, Conditional volatility.
Public URL https://durham-repository.worktribe.com/output/1413183

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Copyright Statement
NOTICE: this is the author’s version of a work that was accepted for publication in Journal of International Financial Markets, Institutions and Money. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of International Financial Markets, Institutions and Money, 36, May 2015, 10.1016/j.intfin.2015.02.002.




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