Missing trader fraud on the emissions market

Abstract

PurposeThe aim of this paper is to show evidence and to quantify with forensic econometric methods the impact of the missing trader fraud (MTF) on European carbon allowances markets. This fraud occurred mainly between the end of 2008 and the beginning of 2009. In this paper, the financial mechanisms of the fraud are explored and the impact on the market behaviour, as well as the consequences on its econometric features.Design/methodology/approachIn a previous work, the first and second authors showed that the European carbon market is strongly influenced by fundamentals factors as oil, energy, gas, coal and equities. Therefore, the authors calibrated arbitrage pricing theory‐like models. These models enabled the impact of each factor on the market to be quantified. In this study, the authors focused more precisely on spot prices quoted on Paris‐based Bluenext market over 2008 and 2009. During this period, a significant drop in performances and robustness of the model and a reduced sensitivity of carbon prices to fundamentals was observed.FindingsThe authors identify the period where the market was driven by MTF movements and 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. The authors estimate the impact of the value added tax extortion on the carbon market at €1.3 billion.Originality/valueThis paper describes the first study that attempts to prove and quantify scientifically the MTF on emission markets.