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The Role of Trader Positions in Carbon Market Forecasting

Author

Listed:
  • Maria Mansanet-Bataller

    (Université Marie et Louis Pasteur, CRESE, F-25000 Besançon, France)

  • Fernando Palao

    (Department of Internal Audit, CaixaBank, Madrid, Spain)

  • Ángel Pardo

    (Department of Financial Economics, Faculty of Economics, University of Valencia, Valencia, Spain)

Abstract

This study examines the positions of carbon traders in the European Carbon Futures Market and their predictive power, revealing distinct roles among participants. Investment Firms and Credit Institutions predominantly take short positions, serving as liquidity providers for Compliance Entities and Other Non-financial participants, who mainly hold long positions. Correlation analysis shows that as the number of entities grows, carbon volatility decreases or remains stable, but never increases. In the short term, trader positions have no impact on carbon returns or the bid-ask spread. However, shifts in the net positions of Investment Firms and Credit Institutions and Compliance Entities and Other Non-financial traders increase carbon market volatility over the following two weeks. Finally, while the net positions of Investment Funds and Other Financial Institutions significantly forecast long-term carbon returns, Compliance Entities and Other Non-financial participants offer no predictive insight, despite their considerable compliance-driven market activity.

Suggested Citation

  • Maria Mansanet-Bataller & Fernando Palao & Ángel Pardo, 2025. "The Role of Trader Positions in Carbon Market Forecasting," Working Papers 2025-02, CRESE.
    • Handle: RePEc:crb:wpaper:2025-02
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    More about this item

    Keywords

    Commitments of Traders reports; EUA; EU ETS; price; volatility;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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