Arbitrage opportunities and feedback trading in emissions and energy markets

Research output: Contribution to journalArticlepeer-review



This paper extends Sentana and Wadhwani (SW 1992) model to study the presence of feedback trading in emissions and energy markets and the extent to which such behaviour is linked to the level of arbitrage opportunities. Applying our augmented models to the carbon emission and major energy markets in Europe, we find evidence of feedback trading in coal and electricity markets, but not in carbon market where the institutional investors dominate. This finding is consistent with the notion that institutional investors are less susceptible to pursuing feedback-style investment strategies. In further analysis, our results show that the intensity of feedback trading is significantly related to the level of arbitrage opportunities, and that the significance of such relationship depends on the market regimes.


Original languageEnglish
Pages (from-to)130-147
Number of pages18
JournalJournal of International Financial Markets, Institutions and Money
Early online date9 Feb 2015
Publication statusPublished - 1 May 2015


  • Arbitrage opportunities, Conditional volatility, Emissions and energy markets, Feedback trading