Tuesday, November 02, 2010

Fraud, missing traders and the emissions market

Some readers maybe more surprised that others that there was fraud on the European carbon allowances market.

I am pleased that someone has looked at this issue using "forensic econometric methods" which sound fun to use (although seemingly difficult to understand).

It sounds good but I am still unclear how this works - I will have to read the paper.

MISSING TRADER FRAUD ON THE EMISSIONS MARKET[PDF]

Marius-Cristian Frunza, Dominique Guegan and Fabrice Thiebaut

Abstract
Purpose – The aim of this paper is to show evidence and to quantify with forensic econometric methods the impact of the missing trader fraud on European carbon allowances markets. This fraud occurred mainly between the end of 2008 and the beginning of 2009. In this paper we explore the financial mechanisms of the fraud and the impact on the market behaviour as well as the consequences on its econometric features.

Design/methodology/approach – In a previous work (Frunza and Gu├ęgan, 2010), we showed that the European carbon market is strongly influenced by fundamentals factors as oil, energy, gas, coal and equities. Therefore, we calibrated Arbitrage Pricing Theory-like models. These models enabled us to quantify the impact of each factor on the market. In this study, we focused more precisely on spot prices quoted on Paris based Bluenext market over 2008 and 2009. We observed during this period a significant drop in performances and robustness of our model and a reduced sensitivity of carbon prices to fundamentals.

Findings – Therefore, we identify the period where the market was driven by missing trader fraud movements and we were able to measure the value of this fraud. Soon after governments passed a law that cut the possibility of fraud occurrence the performance of the model improved rapidly. We estimate the impact of the VAT extortion on the carbon market at 1.3 billion euros.

Originality/value – This paper is the first study that attempts to prove and quantify scientifically the missing trader fraud on emission markets.

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