6533b86cfe1ef96bd12c8bf2

RESEARCH PRODUCT

Do Carbon Traders Behave as a Herd?

Fernando PalaoAngel Pardo

subject

Economics and Econometrics050208 financeFinancial economicsanimal diseases05 social sciencesPattern analysisFutures marketBehavioral economicsCarbon priceOrder (exchange)0502 economics and businessEconomicsHerdHerding050207 economicsVolatility (finance)SpeculationHerd behaviorFutures contracthealth care economics and organizationsFinance

description

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.

https://doi.org/10.2139/ssrn.2816278