School of Economics and Finance

No. 652: Disposition in the Carbon Market and Institutional Constraints

Leon Vinokur , Queen Mary, University of London

October 1, 2009

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This paper investigates the impact of banking and submission constraints, set by the EU Emission Trading Scheme, on the efficiency of the carbon permits spot market using intra-daily data. My aim is to identify whether there is a Disposition effect in the spot market. I will examine a data set that includes spot prices for the First and Second Phases of the Scheme from 24 June 2005 to 07 August 2009. I find that the Disposition effect is significantly high at the beginning of each Phase and decreases close to the first compliance event. In the light of these results I propose a lifting of the ban on banking between Phases and an increased emissions information disclosure in order to increase the efficiency of the Scheme.

J.E.L classification codes: G11, G18, D84, Q48

Keywords:Carbon market, Psychological biases, Institutional constraints