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.
Highlights
The endowment effect is a phenomenon: an agent has an increased preference towards an item, triggered by mere possession of that item [1]
The long-term price fluctuations are calculated through constructing an Empirical Mode Decomposition (EMD) method on Python 3(Guido van Rossum; open-source )the impacts of trading experience and compliance pressure on the endowment effect can be analyzed through EViews 10 9 (IHS Global INC., Irvine, CA, USA)
For the first time, the presence of the endowment effect is analyzed in a real market based on the complete transaction data from 2008 to 2012, and whether the endowment effect will be influenced by trading experience is investigated
Summary
The endowment effect is a phenomenon: an agent has an increased preference towards an item, triggered by mere possession of that item [1]. In the case of trading, the endowment effect predicts an asymmetry between willing to pay (WTP) and willing to accept (WTA). The presence of endowment effect has been confirmed by various experiments [2,3]. Knetsch and Sinden [4] found the proof that the endowment effect is presented in parts of goods. Kahneman et al [5] and List [6,7] showed that the endowment effect pervasively exists in consumer goods, but not in speculative goods. Efforts are continuously been paid to identify the presence of the endowment effect in trading [10,11,12]. Researchers have reached an agreement: during the experiment, the behaviors of the experimenters may distort participants’ valuation, and thereby affect the participants’ decisions
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