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Regulated and non-regulated companies, technology adoption in experimental markets for emission permits, and options contracts

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This paper examines the investment strategies of regulated companies in abatement technologies, market participants' trading behaviors, and the liquidity level in an inter-temporal cap{and{trade market using laboratory experiments. The experimental analysis is performed under varying market structures: the exclusive presence of regulated companies; the inclusion of subjects not liable for compliance with environmental regulations; the availability of plain vanilla options. In line with theoretical models on irreversible abatement investment, the first experiment shows that regulated companies trade permits at a premium. At the same time the existence of a strict enforcement structure effectively prompts investments in new technologies. The second experiment shows that the presence of non-regulated companies adds liquidity to the market and does not increase price volatility. The last experiment enables us to investigate the impact of the presence of cash-settled options contracts on the trading strategies of regulated companies. Their expected emissions appears to play a signifcant role in the choice of their options strategy.

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en

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application/pdf

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http://eprints.lse.ac.uk/37577/1/Regulated_and_non-regulated_companies%2C_technology_adoption_in_experimental_markets_for_emission_permits%2C_and_options_contracts%28lsero%29.pdf

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