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Liquidity, information, strategic trading in an electronic order book: New insights from the European carbon markets

Yves Rannou

Research in International Business and Finance, 2017, vol. 39, issue PB, 779-808

Abstract: The electronic limit order book (LOB hereafter) has rapidly become the primary way of trading European carbon assets over the 4 years of the EU ETS programme (2008–2012). In this first attempt of examining the informational content of an electronic order book, we evidence that order flow imbalances have a moderate capacity to predict short term price changes. However, we find that both LOB slope and immediacy costs help to forecast quote improvements and volatility in the next 30min. Further, we explain why informed trading is highly influential and show that it consists in mixing order splitting strategies and posting fleeting orders once the asymmetric information is reduced (Rosu, 2009). Overall, the consolidated status of the order book mirrors a high level of market uncertainty and a low degree of informational efficiency. In this way, strategic trading can in itself explain some of order book properties, independently of the degree of traders’ sophistication and market competition.

Keywords: Carbon futures; Market microstructure; Asymmetric information; Order book data; Informed trading (search for similar items in EconPapers)
JEL-codes: G13 G19 G32 E44 (search for similar items in EconPapers)
Date: 2017
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