Limit order books, uninformed traders and commodity derivatives: Insights from the European carbon futures

Yves Rannou (1, 2)

1 CleRMa - Clermont Recherche Management
2 ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand

This paper provides a suitable model for studying the strategic behavior of uninformed investors that trade commodity derivatives via limit order books. Two main testable implications are obtained after solving for the model equilibrium. The adverse selection costs of uninformed traders depend on the inflow of market orders and their risk aversion. Next, the adverse selection costs of uninformed buyers and sellers and the difference of their asset valuations determine the size of their bid-ask spread. An analysis of European carbon futures data confirms the relevance of these implications. Moreover, we detect a diagonal effect that results in a positive correlation of market orders, which is driven by adverse selection, then by order splitting strategies and by imitative strategies of uninformed traders to a lesser extent.

Mots clés: Uninformed traders; Market microstructure; European carbon futures; Bid-ask spread; Limit order book

Domaines: Économie et finance quantitative [q-fin]; Sciences de l'Homme et Société

Yves Rannou. Limit order books, uninformed traders and commodity derivatives: Insights from the European carbon futures. Economic Modelling, 2019, 81, pp.387-410. ⟨10.1016/j.econmod.2019.07.009⟩. ⟨hal-02311467⟩