Do carbon traders behave as a herd? |
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Institution: | 1. Trading and Transport, Middle Office Department, Repsol Group, Madrid, Spain;2. Department of Financial Economics, Faculty of Economics, University of Valencia, Valencia, Spain;1. University College Dublin, Ireland;2. University of Manchester, United Kingdom |
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Abstract: | This paper shows the existence of herding behavior in the European Carbon Futures Market and studies its possible causes and consequences. This market is characterized by leading the carbon price discovery process and by being highly dominated by professional traders. Both features make it an appropriate environment for the existence of herding. A patterns analysis indicates that the herding level increases in speculative periods, on those days on which the price and size clustering effect is stronger, and with the arrival of carbon-related news. Regarding possible market drivers, we find that herding behavior is positively related with the number of trades, the intraday volatility and on days with extreme returns. Our results appear to support the claim that the lower the availability of information, the higher the level of herding. Finally, we show that herding increases market volatility and leads carbon traders to overreact. |
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Keywords: | Herding European Union Allowances EU ETS Behavioral finance Intraday data |
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