An empirical analysis of the Carbon Financial Instrument

Omid Sabbaghi () and Navid Sabbaghi ()

Journal of Economics and Finance, 2014, vol. 38, issue 2, 209-234

Abstract: This study provides an empirical investigation of the price volatility—trading volume relationship for the Carbon Financial Instrument (CFI). A CFI is a financial contract that is traded on the Chicago Climate Exchange (CCX) and represents the right to emit 100 metric tons of CO 2 equivalent. CFI contracts differ from one another on the basis of their allocation year to CCX member firms, referred to as their respective Vintage year. We provide evidence indicating a positive contemporaneous relationship between price changes and trading volume for the different CFI Vintage contracts. Employing bivariate VAR models that adjust for trade duration, we find that CFI price volatility and trading volume are persistent across time. Furthermore, we provide evidence indicating that lagged volume increases price volatility, in addition to lagged price volatility increasing trading volume levels in the CCX market. Our results are in agreement with prior research documenting significant positive price volatility—volume relationships in traditional equity markets. Copyright Springer Science+Business Media, LLC 2014

Keywords: CO 2 Prices; Chicago Climate Exchange; Carbon Financial Instrument; Trading Volume; Sustainability; G11; G12; C58; Q56 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s12197-011-9208-5

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