Arbitrage Opportunities and Feedback Trading in Emissions and Energy Markets

48 Pages Posted: 25 Oct 2014 Last revised: 20 Feb 2015

See all articles by Frankie Chau

Frankie Chau

Durham University Business School

Jing-Ming Kuo

University of Birmingham - Birmingham Business School

Yukun Shi

University of Glasgow; University of Leicester

Date Written: January 25, 2015

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 model to the carbon emission and four major energy markets in Europe, we find evidence of feedback trading in coal and electricity markets, but not in carbon market where 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.

Keywords: Feedback trading; Arbitrage opportunities; Emissions and energy markets; Conditional volatility

JEL Classification: G1, G12, G17

Suggested Citation

Chau, Frankie and Kuo, Jing-Ming and Shi, Yukun, Arbitrage Opportunities and Feedback Trading in Emissions and Energy Markets (January 25, 2015). Journal of International Financial Markets, Institutions and Money, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2510359 or http://dx.doi.org/10.2139/ssrn.2510359

Frankie Chau (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Jing-Ming Kuo

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
University House
Birmingham, Birmingham B15 2TT
United Kingdom

Yukun Shi

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

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