Researchers release v3 of the research paper on trading frictions in the EU carbon market
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Nicola Borri, Yukun Liu, Aleh Tsyvinski, and Xi Wu released v3 of the research paper on trading frictions in the EU carbon market. Based on 2.8 million EU ETS transactions and compliance records from 2005 to 2022, the study finds that 37% of regulated operators in the world's largest carbon market do not participate in trading each year, and this phenomenon is persistent; trading is concentrated in the quota surrender month of April, when returns are systematically higher, operator order flow can predict returns, and this effect is concentrated among frequent traders. The model constructed in the study, which includes market access costs, limited intermediation, and heterogeneous information, can explain the above characteristics. It proposes staggering the compliance deadline into four groups, which can reduce the compliance month premium by 58% without changing the total cap.
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- arXiv q-finTrading Frictions in Dynamic Cap-and-Trade Markets
A study based on 2.8 million EU ETS trades and compliance records from 2005 to 2022 shows that 37% of regulated operators in the world’s largest carbon market do not participate in trading each year, and this phenomenon persists. Trading concentrates in the April compliance month, when returns are systematically higher, operator order flow can predict returns, and this effect is concentrated among frequent traders. A model incorporating market entry costs, limited intermediation, and heterogeneous information can explain these features. Staggering compliance deadlines into four groups can reduce the compliance-month premium by 58% without changing the overall cap.
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