Visible and Invisible Forces. What Drives the Intensity of Trading in the European Carbon Market?

Abstract

This study models the trading intensity in European Allowances (EUA) futures contracts, in the European Climate Exchange (ECX) using various specifications and investigates the forecasting ability of observable versus unobservable factors. This set up tests empirically the impact of the evolving market structure through regulatory updates and the contribution of the different market participants to the intensity of trading in the European Carbon market. The findings suggest that observable market characteristics capture better the dynamics of trading intensity than their latent counterparts, which implies that regulatory changes that enhance transparency would also improve market efficiency.