Trading patterns in the European Carbon Market: the role of trading intensity and OTC transactions

International audienceThis paper examines the effect of trading intensity and OTC transactions on expected market conditions in the early development period of the European Carbon futures market. Past duration and trading intensity are used as information related order flow variables in modelling time between transactions in two new specifications of Autocorrelation Conditional Duration (ACD) models. This allows for specific investigation of non-linear asymmetric effects on expected duration and the impact of OTC transactions. Evidence is presented of two main types of trading episodes of increased and decreased trading intensity. Both have a significant impact on price volatility, which increases further if an OTC transaction intrudes. OTC transactions also play a dual role. They slow down trading activity in the short term (over the next five transactions) but increase it substantially in the long term (over ten transactions). Both the liquidity and information price impact components increase following an OTC trade, but the information impact is greater. Price volatility calms down faster than liquidity effects following an OTC trade, and this is more pronounced in ECX and in Phase II. The combined evidence points towards increased market depth, efficiency and maturity of the trading environment

Carry Trades and Commodity Risk Factors

This paper investigates the importance of commodity prices to the returns of currency carry trade portfolios. We adopt a recently developed empirical factor model to capture commodity commonalities and heterogeneity. Agricultural material and metal price risk factors are found to have explanatory power on the cross-section of currency returns, while commodity common and oil factors do not. Although stock market risk is strongly linked to currencies in developed countries, the agricultural material factor is more important for emerging currencies compared to the stock market factor. This suggests that emerging currencies are somewhat segmented from a common financial market shock

Rising Corporate Debt and Value Relevance of Supply-Side Factors in South Africa

Motivated by the recent discovery of a significant increase in corporate debt in developed countries, we use a large sample of 775 listed companies to examine the dynamics and determinants of South African corporate debt. We find an 89% increase in the leverage of the average rm, from 11% in 1990 to 21% in 2015. Long-term and short-term debt increased by 103% and 67%, respectively. We find that this increase is pervasive, and cannot be explained entirely by either rm attributes or macroeconomic factors, despite the importance of the latter. Instead, we find supply-side factors to be the main determinants of the upward trend in corporate debt, highlighting their importance to corporate debt policies in emerging economies

Common Information in Carry Trade Risk Factors

Carry returns have been widely observed in the FX market. This study exploits the common information embedded in several factors previously identified as relevant to carry trade returns. We find that the extracted common factor successfully models the time series and cross-sectional characteristics of carry returns. Empirical evidence is presented that the common factor produces smaller pricing errors than other well known factors, such as innovations of exchange rate volatility and the downside stock market excess return. Our results also suggest that stock market risk is somewhat segmented from FX market risk

Common Information in Carry Trade Risk Factors

Carry returns have been widely observed in the FX market. This study exploits the common information embedded in several factors previously identified as relevant to carry trade returns. We find that the extracted common factor successfully models the time series and cross-sectional characteristics of carry returns. Empirical evidence is presented that the common factor produces smaller pricing errors than other well known factors, such as innovations of exchange rate volatility and the downside stock market excess return. Our results also suggest that stock market risk is somewhat segmented from FX market risk

Asset Prices and Capital Share Risks: Theory and Evidence

An asset pricing model using long-run capital share growth risk has recently been found to successfully explain U.S. stock returns. Our paper adopts a recursive preference utility framework to derive an heterogeneous asset pricing model with capital share risks.While modeling capital share risks, we account for the elevated consumption volatility of high income stockholders. Capital risks have strong volatility effects in our recursive asset pricing model. Empirical evidence is presented in which capital share growth is also a source of risk for stock return volatility. We uncover contrasting unconditional and conditional asset pricing evidence for capital share risks

The Time-Varying Risk Price of Currency Carry Trades

Recent studies show that carry trade returns are predictable and this predictability reflects changes in expected returns. Changes in expected returns may be related to time variation in betas and risk prices. We investigate this issue in carry trades and find clear evidence of time-varying risk prices for the carry factor (HMLFX). The results further indicate that time-varying risk prices are more important than time-varying betas for the carry trade asset pricing model. This suggests that investors overreact to changes in economic states

Carry Trades and Commodity Risk Factors

This paper investigates the importance of commodity prices to the returns of currency carry trade portfolios. We adopt a recently developed empirical factor model to capture commodity commonalities and heterogeneity. Agricultural material and metal price risk factors are found to have explanatory power on the cross-section of currency returns, while commodity common and oil factors do not. Although stock market risk is strongly linked to currencies in developed countries, the agricultural material factor is more important for emerging currencies compared to the stock market factor. This suggests that emerging currencies are somewhat segmented from a common financial market shock

A Stock Market Trading System Based on Foreign and Domestic Information

This paper investigates whether a particular magnitude and direction of inter-regional return signal transmission dominates the performance of domestic trading in American, European and Australasian stock markets. A trading system design, based on fuzzy logic rules, combines direct and indirect channels of foreign information transmission, modelled by stochastic parameter regressions, with domestic momentum information to generate stock market trading signals. Filters that control for magnitude and direction of trading signals are then used to investigate incremental impact on economic performance of the proposed investment system. The results indicate that at reasonable levels of transaction costs very profitable trades that are fewer in number do not increase investment performance as much as trades based on foreign information of a specific low-to-medium daily return magnitude of 0.5% to 0.75%. These information-based strategies are profitable on risk-adjusted bases and relative to a market, but performance declines considerably when traded instruments are used

Autoregressive Conditional Weighted Duration: Measuring Temporal Dependence of Order Flow in the European Carbon Futures Market.

Trading intensity in the European Carbon market has been found to carry price relevant information, prior to price changes. In this paper we propose a natural measure of trade intensity, the weighted durations, and we model it as a rescaled point process, using the ACD (Engle and Russell, 1998) framework to model liquidity dynamics in the early stages of EU ETS. The new model is called Autoregressive Conditional Weighted Duration (ACWD) and is employed to analyse the trading behaviour of market participants with respects to trading intensity and OTC transactions, as well as intraday uncertainty resolution. The findings confirm the existence of two sources of strong momentums in trading activity and return volatility. OTC trades appear to be strategic, by entering the market when their price impact is minimum. They introduce large in magnitude uncertainty shocks that they need at least five minutes to be absorbed. In parallel, relatively higher trading intensity trades also introduce uncertainty, which is lower in magnitude and takes longer to be resolved into price. Both shocks are absorbed faster in market environments where overall liquidity is higher. This suggests that although absolute liquidity improves overall market maturity, by allowing faster uncertainty resolution, relative liquidity is still linked to higher presence of better informed agents and thus, introduces uncertainty