An Endowment Effect Study in the European Union Emission Trading Market based on Trading Price and Price Fluctuation

Abstract

This paper pioneers to investigate the endowment effect in the European Union mission Trading Scheme (EU ETS) as well as the impacts of trading experience and compliance pressure on the endowment effect. This study is based on the complete transaction records of the market. In the data set, the records of two consecutive reverse transactions from a same emitting company are selected. The lowest price that the buyer is willing to pay (WTP) and the maximum price the seller is willing to accept (WTA) are evaluated by excluding their risk cost that is used to avoid short-term fluctuations in the price. By distinguishing the difference between WTA and WTP, and long-term fluctuations in the prices during the two transactions, the trader’s endowment effect can be quantitively assessed. The results show that the degree of endowment effect of traders follows the trading experience. In addition, since the EU ETS is a cap-and-trade market, the traders face different levels of compliance pressure; when the pressure of the emission companies increases, the degree of endowment effect will also decrease.