Liquidity,information, strategic trading in an electronic order book: New insights from the European carbon markets |
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Institution: | 1. University of Evry, France;2. ESSCA School of Management, France;1. Department of Business and Economics, Ursinus College, 601 East Main Street, Collegeville, PA 19426, United States;2. Department of Economics, Fordham University, 113 West 60th Street, NY, NY 10023, United States;1. University of Evry, 2, rue Facteur Cheval, 91025 Evry, France;2. ESSCA – School of Management, Strategy and Management, 55 quai Alphonse Le Gallo, 92513 Boulogne-Billancourt Cedex, France;3. University of Minho, Department of Economics and Economic Policies Research Unit (NIPE), Campus of Gualtar, 4710-057 Braga, Portugal;4. London School of Economics, LSE Alumni Association, Houghton Street, London WC2 2AE, United Kingdom;1. University of Ottawa, Canada;2. Royal Military College of Canada, Canada;3. Carleton University, Canada;1. Department of Economics, University of Calgary, Calgary, Alberta T2N 1N4, Canada;2. Department of Economics and Finance, University of South Alabama, Mobile, AL 36688, United States;1. IPAG Business School, IPAG Lab, 184 Boulevard Saint-Germain, 75006 Paris, France;2. Lombard Odier Asset Management, and University Paris 1 (CES), France |
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Abstract: | The electronic limit order book (LOB hereafter) has rapidly become the primary way of trading European carbon assets over the 4 years of the EU ETS programme (2008–2012). In this first attempt of examining the informational content of an electronic order book, we evidence that order flow imbalances have a moderate capacity to predict short term price changes. However, we find that both LOB slope and immediacy costs help to forecast quote improvements and volatility in the next 30 min. Further, we explain why informed trading is highly influential and show that it consists in mixing order splitting strategies and posting fleeting orders once the asymmetric information is reduced (Rosu, 2009). Overall, the consolidated status of the order book mirrors a high level of market uncertainty and a low degree of informational efficiency. In this way, strategic trading can in itself explain some of order book properties, independently of the degree of traders’ sophistication and market competition. |
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Keywords: | Carbon futures Market microstructure Asymmetric information Order book data Informed trading |
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