Futures trading with information asymmetry and OTC predominance: Another look at the volume/volatility relations in the European carbon markets

This paper constitutes the first exercise of analysing the European carbon market efficiency from a double perspective combining both nature of execution venues (screen vs. OTC trading) and their volatility/liquidity relations. Using a bivariate asymmetric GJR-GARCH model, we first document that OTC (exchange traded) trading volume shows consistent bi-(uni) directional Granger causality to our volatility estimates, consistent with greater responsiveness of the OTC (exchange traded) market to changes in market-wide (idiosyncratic) risks. Second, we report significant contemporaneous and lagged positive causality of OTC derivatives volume on spot/futures volatility confirming that the Sequential Information Arrival Hypothesis (SIAH) applies. Third, we find that the one-way causality from OTC to futures volumes is mainly driven by heterogeneous investor beliefs: trading volume provides an indication on how (private) information is dispersed and held at different levels rather than proxying information signal itself. After rejecting execution venues' substitutability, we advocate for systematic clearing and netting of OTC positions through a unique clearing house and reporting rules to identify speculation in line with Mifid (Art. 59) proposals.