Carbon Financial Instruments, thin trading, and volatility: Evidence from the Chicago Climate Exchange

Omid Sabbaghi and Navid Sabbaghi

The Quarterly Review of Economics and Finance, 2011, vol. 51, issue 4, 399-407

Abstract: We provide the first econometric investigation of volatility dynamics for the Carbon Financial Instrument (CFI) traded on the Chicago Climate Exchange (CCX). A CFI is a financial contract with the right to emit 100 metric tons of CO2 equivalent. In this study, we present evidence of infrequent trading in the CCX, consistent with emerging markets that are inhabited by non-competitive agents trading permits. We explore the relationship between the observed thin trading effects and GARCH model testing and estimation, concluding with some implications for volatility-based Value-at-Risk forecasts. Our results are important for traders of Carbon Financial Instruments and for policy makers seeking to improve the design of the Chicago Climate Exchange.

Keywords: Volatility; Trading volume; Chicago Climate Exchange; Carbon Financial Instrument; Sustainability (search for similar items in EconPapers)
JEL-codes: G11 G12 Q56 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:51:y:2011:i:4:p:399-407

DOI: 10.1016/j.qref.2011.07.004

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