Modeling the Probability of Informed Trading in the European Carbon Market

46 Pages Posted: 9 Jul 2012

See all articles by Vicente Medina

Vicente Medina

University of Valencia

Ángel Pardo Tornero

University of Valencia - Department of Financial Economics

Roberto Pascual

Universidad de las Islas Baleares

Date Written: July 1, 2012

Abstract

We provide evidence of informed trading in the European carbon market. We adapt Easley et al.’s (1996) PIN methodology to the particularities of this market by isolating the trading activity on the two carbon offsets: European Union Allowances (EUAs) and Certified Emission Reductions (CERs). We find that the PIN regularly increases before the publication of the yearly verified-emission reports. CERs exhibit lower average PIN than EUAs. While the PIN of CERs has increased over time, together with its share in total trading activity, EUAs’ PIN has remained pretty stable. Our findings suggest that CERs must not be avoided in any decision or analysis made by researchers, regulators or traders interested in the European carbon market.

Keywords: Probability of Informed Trading (PIN), European Union Allowances (EUAs), Certified Emission Reductions (CERs), European Union Emission Trading Scheme (EU-ETS), market microstructure, high-frequency data, efficiency

JEL Classification: G1

Suggested Citation

Medina, Vicente and Pardo Tornero, Ángel and Pascual Gascó, Roberto, Modeling the Probability of Informed Trading in the European Carbon Market (July 1, 2012). Available at SSRN: https://ssrn.com/abstract=2102600 or http://dx.doi.org/10.2139/ssrn.2102600

Vicente Medina (Contact Author)

University of Valencia ( email )

Avda. de los Naranjos s/n
Valencia, Valencia E-46022
Spain

Ángel Pardo Tornero

University of Valencia - Department of Financial Economics ( email )

Avda. del Tarongers, s/n
46022 Valencia
Spain

Roberto Pascual Gascó

Universidad de las Islas Baleares ( email )

Ctra. de Valldemossa km 7,5
Departamento de Economia y Empresa
Palma, Baleares
Spain
+34 971 17 13 29 (Phone)
+34 971 17 23 89 (Fax)

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