Applied Energy 308 (2022) 118313

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Applied Energy
journal homepage: www.elsevier.com/locate/apenergy

Does herding behavior exist in China’s carbon markets?

Xinxing Zhou a, Yan Gao a, Ping Wang b, *, Bangzhu Zhu c, *, Zhanchi Wu b, *
a
School of Management, University of Shanghai for Science and Technology, Shanghai 200093, China
b
School of Management, Jinan University, Guangzhou 510632, China
c
School of Business, Guangxi University, Nanning 530004, China

H I G H L I G H T S

• The first to examine the herding behavior in China’s eight carbon markets.
• Beijing, Shanghai, Chongqing, Fujian four carbon markets exist herding behavior.
• There is no herding behavior in China’s overall carbon market.
• Herding intensity is positively correlated with carbon market volatility.

A R T I C L E I N F O A B S T R A C T

Keywords: This paper introduces a modified cross-sectional absolute deviation approach to measure the existence of herding
Carbon market behavior and herding asymmetry, and uses the runs test to measure the herding intensity in China’s carbon
Herding behavior markets. It is the first study to examine the existence of herding behavior in China’s carbon markets. The
Cross-sectional absolute deviation
empirical results show that no herding behavior exists in China’s overall carbon market. As for herding asym­
Runs test
metry, no herding behavior exists in both up and down markets and in the markets with high and low trading
China
volumes, as well as in the markets with high volatility. Among China’s eight carbon markets, herding behavior
exists in Beijing, Shanghai, Chongqing, and Fujian, in which Chongqing has the highest herding intensity, while
Guangdong, Hubei, Shenzhen, and Tianjin have no herding behavior. The herding behavior is prone to the
occurrence when carbon price continuously rises or falls with high volatility. When the carbon market is highly
volatile with a large transaction volume, the herding intensity is high. Herding intensity is positively correlated
with market volatility. Finally, we propose policy implications to mitigate herding behavior.

1. Introduction
The global energy structure is dominated by fossil fuels. Industrial
production contributes to large amounts of greenhouse gas (GHG)
emissions, resulting in climate change. Promoting energy efficiency and
tackling climate change have attracted attention all over the world. The
Paris Agreement set a goal of achieving carbon neutrality in the second
half of this century. The task of global carbon emission reduction and
energy structure transformation is urgent and arduous. As the world’s
biggest emitter of carbon emissions, China has always been a responsible
power in dealing with climate change, which has made the commitment
that carbon emissions will reach the peak before 2030, and achieve
carbon neutrality before 2060 [1]. Carbon pricing mechanism is crucial
to achieving carbon neutrality, which is implemented by carbon tax and
carbon market. The carbon market can promote carbon emission
reduction and energy structure transformation at the lowest cost, which
is an effective tool to achieve the carbon emissions peak and carbon­
–neutral targets [2]. With the launch of the national carbon market on
July 16, 2021, China’s carbon market has overtaken the European Union
(EU) carbon market to become the world’s largest carbon market, which
has aroused widespread international attention. Nowadays, China’s
carbon emissions are huge, and the total energy demand will continue to
grow for a certain period of time. Therefore, the task of achieving carbon
emissions peak and coping with climate change is still tough. Carbon
market is an important application in energy field. Firstly, constructing a
carbon market with a sound mechanism is conducive to effective carbon
pricing and tackling climate change. Moreover, the healthy develop­
ment of the carbon market can promote the transformation of energy

* Corresponding authors.
E-mail addresses: wyuwangping@126.com (P. Wang), wpzbz@126.com (B. Zhu), wuzhanchi@sina.com (Z. Wu).

https://doi.org/10.1016/j.apenergy.2021.118313
Received 20 July 2021; Received in revised form 29 November 2021; Accepted 30 November 2021
Available online 11 December 2021
0306-2619/© 2021 Elsevier Ltd. All rights reserved.
X. Zhou et al.
structure, and motivate the realization of the carbon–neutral target. This
paper mainly explores China’s carbon markets. Through literature re­
view, we find that the development of China’s carbon market is still at an
early stage, in which its market mechanism is immature with price
bubbles and high market risks [3]. Inspired by the behavioral finance
theory, irrational behaviors of investors in the carbon market lead to
abnormal carbon price fluctuations, which increases market risk [4],
aggravates market inefficiency [5] and affects the stability of carbon
markets [6]. Herding behavior is an irrational investor behavior. It was
first put forward by Keynes [7], indicating that under the condition of
incomplete information, investors are influenced by others, so as to
ignore their information and follow others’ decision-making. These
adverse consequences highlight the importance of detecting herding
behavior in financial markets. Measuring herding behavior in China’s
carbon markets contributes to identifying potential risks, reducing the
irrational behaviors of investors and guiding the formation of appro­
priate investment strategies. Thus, it can maintain the sustainable
development of China’s carbon markets, so as to play its role in con­
trolling carbon emissions, promote the transformation of energy struc­
ture, and achieve China’s carbon emissions peak and carbon–neutral
goals [8]. Therefore, detecting whether irrational herding behavior ex­
ists among investors in China’s carbon markets has become one of the
hot topics in the field of energy finance.
In recent years, a large amount of literature has explored herding
behavior in stock markets and financial markets. Haw [9] proposed
“herd mentality could be driving the world of finance”, and mentioned
that herding behavior exists in stock markets in nature, which high­
lighted the importance of exploring herding behavior in financial mar­
kets. Numerous studies have adopted the cross-sectional standard
deviation (CSSD) and the cross-sectional absolute deviation (CSAD)
approaches to measure the existence of herding and herding asymmetry
in Chinese stock markets [10], Mongolian stock markets [11] and in­
ternational stock markets [12]. Christie and Huang [13] first proposed
the cross-sectional standard deviation (CSSD) approach to explore
herding behavior. Chang et al. [14] improved the CSSD method by
proposing a more robust dispersion approach: the cross-sectional abso­
lute deviation (CSAD). CSAD is an optimization of CSSD and has better
explanatory power, which has been proved to more accurately measure
herding behavior. Therefore, a large number of studies have adopted the
CSAD method to measure the existence and the asymmetry of herding
behavior in the United States (US) stock markets [15], Russian stock
markets [16] and Asian commodity markets [17]. However, most
literature focuses on herding behavior in financial markets and less
attention is paid to energy and climate markets. Balcılar et al. [18] used
the CSAD method to detect whether changes in herding behavior of
stock markets were related to speculation and volatility of global oil
markets. BenMabrouk and Littimi [19] employed the CSAD method to
measure herding behavior between stock markets and crude oil markets.
Jaffe [20] emphasized the importance of curbing herding behavior in
energy finance markets, which could avoid climate collapse. Chang et al.
[21] adopted the CSAD method to measure the herding behavior of
renewable energy markets in the United States, Europe and Asia, and
found that for extremely low oil returns, investors were more inclined to
herd. Although little literature has focused on herding behavior in the
energy markets so far, investors’ sentiment in energy markets has been
widely studied. Several researches have detected the influence of in­
vestors’ attention on crude oil prices [22] and the impact of investors’
attention on oil market volatility [23]. Zhang and Li [24] explored the
impact of investors’ sentiment on Chinese oil markets. Ding et al. [25]
measured the contagion effect of the international crude oil market on
investors’ sentiment in Chinese stock market. These studies show that
the application of behavioral finance in the energy markets is highly
valued for further study.
As for the application of behavioral finance to carbon market.
Kalaitzoglou and Ibrahim [26] analyzed different types of market
traders’ behaviors in EU carbon market. Several studies explored the
2
Applied Energy 308 (2022) 118313
influence of investors’ sentiment [27] and traders’ behaviors [28] in EU
carbon market. Palao and Pardo [29] investigated the existence of
psychological price in EU carbon market. Wang et al. [30] adopted the
ARMA-GARCH model to measure the impact of market trading behav­
iors on EU carbon prices. Palao and Pardo [31] detected how carbon
price, market volatility and the related factors affect traders’ behaviors
in EU carbon market. To the best of our knowledge, only a little litera­
ture has explored herding behavior in the carbon market up to now.
Palao and Pardo [32] adopted the runs test to measure the existence of
herding behavior in EU carbon market, and detected the driving factors
of herding behavior as well. It is the first time to prove the existence of
herding behavior in EU carbon market, indicating that herding behavior
is correlated with the number of transactions, market volatility and
market returns, and that herding increases market volatility. It is worth
mentioning that the runs test has been adopted in measuring herding
behavior. Simões-Vieira and Valente-Pereira [33] used the runs test to
explore the existence of herding behavior in Portuguese stock markets.
Madaan and Shrivastava [34] applied the runs test to investigate herd­
ing behavior and its persistence among investors of the energy sector in
Indian stock market. From the above researches, herding behavior has
been widely studied in stock markets, capital markets and financial
markets. However, only a few references measured herding behavior in
global oil markets [18], crude oil markets [19] and energy finance
markets [20,21], and a little literature explored herding behavior in EU
carbon market [32]. Since the launch of China’s pilot carbon markets in
2013, more and more literature has explored carbon price volatility
[35], carbon market risks [4] and carbon market spillover effects [36].
However, no research has detected the presence of herding behavior in
China’s carbon markets so far.
To fill this gap, we are the first to explore the existence of herding
behavior and herding asymmetry in China’s overall carbon market
through a modified CSAD approach, and measure the herding behavior
and herding intensity in China’s eight carbon markets through a runs
test. Herding intensity refers to the degree of consistency between in­
vestors, which indicates the degree of herding behavior. The purpose of
this study is to propose empirical methods to identify herding behavior
in China’s carbon markets to improve investors’ behaviors and reduce
carbon market risk as well. The main contributions are as follows.
Firstly, it is the first study to measure investors’ herding behavior in
China’s carbon markets. We use the improved CSAD method and the
runs test to measure the existence and asymmetry of herding behavior in
China’s carbon markets, which can fill the gap of herding behavior
research in China’s carbon markets. Secondly, the methodology we
adopted is more advanced compared to previous studies. CSAD is more
accurate in measuring herding, and is superior to CSSD in terms of
explanatory power. The modified CSAD model can effectively address
the autocorrelation and multicollinearity, which significantly improves
the goodness of fit in parameter estimation, and has been proved to be
robust. The runs test has been used to explore the herding in eight
carbon markets, which can overcome the shortcoming of CSAD that
cannot measure the herding in the market with one trading product. The
combination of CSAD and runs test methods can effectively estimate the
herding behavior in China’s overall carbon market and eight carbon
markets, which is feasible and reliable. Thirdly, we present novel find­
ings on how investors’ herding behavior affects carbon market. The
herding behavior is prone to occurrence when carbon price continuously
rises or falls, and when the price rises and falls with a high transaction
volume, the herding intensity is higher. Herding intensity is positively
correlated with carbon market volatility. Applying behavioral finance to
the field of the carbon market, which can contribute to better under­
standing of the characteristics of carbon market participants, and thus
providing the theoretical basis for maintaining the efficient operation of
China’s carbon markets.
The rest of the paper is arranged as follows. Section 2 reports the
methods used in this study. Section 3 presents the data. Section 4 reports
the empirical results. Section 5 concludes with several policy
X. Zhou et al. Applied Energy 308 (2022) 118313

implications. coefficients. CSADt− 1 is the lagged term of CSADt , which is introduced

into the model to address autocorrelation. γ 3 is the coefficient of
2. Methodology CSADt− 1 . Through the two improvements, the modified model is defined
as follows:
In this study, we propose the modified CSAD model to measure ⃒ ⃒ ( )
CSADt = α + γ 1 ⃒Rm,t ⃒ + γ2 Rm,t − Rm 2 + γ 3 CSADt− 1 + εt (5)
herding behavior in China’s overall carbon market, which takes eight
carbon markets as a whole, and explores asymmetric herding effects of The empirical studies of herding in this paper are based on the
market return, trading volume, and market volatility. Furthermore, we modified CSAD model. The significant negative coefficient γ2 indicates
conduct robustness tests on the modified CSAD model. Finally, we adopt the existence of herding behavior in China’s carbon markets, and vice-
the runs test to test herding behavior and herding intensity in China’s versa.
eight carbon markets.
2.2. Estimates of herding asymmetry in China’s overall carbon market
2.1. Estimates of herding behavior in China’s overall carbon market
The carbon market has different stages, such as rising, falling or
Based on the conventional capital asset pricing model (CAPM) [37], alternately, indicating different market returns. Investors’ psychology
Chang et al. [14] proposed the cross-sectional absolute deviation (CSAD) differs in different stages, leading to diverse investment behaviors.
model, which defines that there is a negative nonlinear relationship Trading volume and market volatility are important indicators related to
between CSAD and market returns in the presence of herding. The CSAD the herding behavior of carbon markets, which also affect investors’
model provides several advantages over the original CSSD proposed by behaviors. In recent years, several studies have explored the asymmetry
Christie and Huang [13], defined as follows: of herding behavior in stock markets [10,16] and commodity markets
[17]. Dutta et al. [39] confirmed the existence of asymmetric volatility
1 ∑ effects in EU carbon market. In this study, we explore the asymmetric
N ⃒ ⃒
CSADt = ⃒Ri,t − Rm,t ⃒ (1)
N t=1 effects of market return, trading volume and market volatility in China’s
carbon markets.
Pi,t CSADt in up market (Rm,t > 0) and down market (Rm,t < 0) are
Ri,t = ln( ) (2)
Pi,t− 1 defined as follows:
⃒ ⃒ ( )
up ⃒ up ⃒
(6)
up up 2
1 ∑N CSADup up
t = α +γ 1 ⃒Rm,t ⃒ +γ 2 Rup
m,t − Rm +γup up
3 CSADt− 1 + εt If Rm,t > 0
Rm,t = Ri,t (3)
N i=1

⃒ ⃒ ( )
⃒ down ⃒
(7)
down 2
CSADdown
t = αdown + γ down
1 ⃒Rm,t ⃒ + γdown
2 Rdown
m,t − Rm + γdown
3 CSADdown
t− 1 + εt , If Rm,t < 0

⃒ ⃒ ( )
CSADt = α + γ 1 ⃒Rm,t ⃒ + γ 2 Rm,t 2 + εt (4) where CSADup t and CSADt
down
are the measures of market return disper­
sion in up and down markets on trading day t, respectively. αup and αdown
where N is the number of carbon markets. Ri,t is the logarithmic return of are constants. Rup down
m,t and Rm,t are average market returns in up and down
carbon market i on trading day t. Rm,t is the cross-sectional equal- up down
markets corresponding to time t. Rm and Rm are arithmetic mean of
weighted mean returns on trading day t of all the carbon markets [11].
Rup down up up up down down down
m,t and Rm,t overtime. γ 1 , γ 2 , γ 3 and γ 1 , γ2 , γ 3 are coefficients
Previous studies have shown that there is no difference in using value-
weighted or equally-weighted market portfolio returns [11,12]. Thus, to be estimated. CSADup down up
t− 1 and CSADt− 1 are lagged terms of CSADt and
down
equally-weighted market returns are adopted in Eq. (1). Pi,t is the closing CSADt . Up market is the days with positive market returns, while
prices of carbon market i on trading day t. Pi,t− 1 is the closing prices of down market is the days with negative market returns. The significantly
negative coefficients γ up
⃒ ⃒ down
carbon market i on trading day t − 1. α is the constant. ⃒Rm,t ⃒ is the ab­ 2 and γ 2 indicate the existence of herding
solute value of Rm,t . R2m,t is the squared market return. CSADt is the behavior in China’s carbon markets, and vice-versa.
⃒ ⃒ Inspired by Yao et al. [10], the high and low trading volumes are
measure of market return dispersion. γ1 and γ2 are coefficients of ⃒Rm,t ⃒ high
( )2 defined as follows. CSADt and CSADlow t are the trading volume of t day
and Rm,t , respectively. εt is the residual term on trading day t. If γ2 is
higher and lower than the moving average of the last 30 days. The
negative and statistically significant (γ2 < 0), indicating the existence of
asymmetric effect of market trading volume is tested by:
herding behavior, and vice-versa. The greater the absolute value of γ 2 is,
⃒ ⃒ ( )
the higher the degree of herding is. CSADhigh = αhigh + γhigh
⃒ high ⃒ high
Rhigh
high 2
+ γ high high
1 ⃒Rm,t ⃒ + γ 2 m,t − Rm 3 CSADt− 1 + εt
Although the CSAD model has a good theoretical basis and enjoys
t

several advantages over the CSSD model, there are still a few potential (8)
defects in empirical studies [15–17]. Firstly, explanatory variables Rm,t ⃒ ⃒ ( )
⃒ low ⃒
(9)
low 2
and R2m,t have a high degree of multicollinearity. Secondly, time-series CSADlow
t = αlow + γlow low
1 ⃒Rm,t ⃒ + γ 2 Rlow
m,t − Rm + γ low low
3 CSADt− 1 + εt

data have the tendency to be auto-correlated, which leads to the devi­

high
ation of parameter estimation and biased results. Inspired by Yao et al. where αhigh and αlow are constants. Rm,t and Rlow
m,t are average market
[10], we improve the model from two aspects to enhance its explanatory returns in high and low trading volume markets corresponding to time t,
power. Firstly, the variable Rm is introduced, which is the arithmetic respectively. Rm
high low high
and Rm are arithmetic mean of Rm,t and Rlow
( ) m,t over­
mean of Rm,t . R2m,t is replaced by Rm,t − Rm 2 to eliminate multi­ high high high low low low
time. γ1 , γ2 , γ 3 and γ1 , γ2 , γ3 are coefficients to be estimated.
collinearity. Secondly, the Newey-West heteroscedastic and autocorre­ high high
lation consistent estimator [38] is adopted to estimate regression CSADt− 1 and CSADlow t− 1 are lagged terms of CSADt and CSADlow
t . The

3
X. Zhou et al. Applied Energy 308 (2022) 118313

significantly negative coefficients γ2 and γ low

high amount of runs (R), which is the well-ordered sequence of n elements of
2 indicate the existence of
herding behavior in China’s carbon markets, and vice-versa. two types. The null hypothesis is that the sequence is random, following
The high and low market volatility are defined as follows. CSADt
V− high a normal distribution. The mean μ and variance σ2 are defined as
follows:
and CSADV−t
low
are market volatility of the t day higher and lower than
the moving average of the last 30 days. Followed by Yao et al. [10], we 2n1 n2 2n1 n2 (2n1 n2 − n1 − n2 )
μ= + 1, σ2 = (12)
measure market volatility with the square of market return. The asym­ n1 + n2 (n1 + n2 )2 (n1 + n2 − 1)
metric effect of market volatility is tested by:

⃒ ⃒ ( )
high ⃒ V− high ⃒
(10)
V− high
CSADV−
t
high
= αV− high
+ γV−
1
V− high
⃒Rm,t ⃒ + γ 2 RV−
m,t
high
− Rm 2
+ γ V−
3
high
CSADV−
t− 1
high
+ εt

⃒ ⃒ ( )
low ⃒ V− low ⃒
(11)
V− low
CSADV−
t
low
= αV− low
+ γ V−
1 ⃒Rm,t ⃒ + γ V−
2
low
RV−
m,t
low
− Rm 2
+ γ V−
3
low
CSADV−
t− 1
low
+ εt

where n1 is the number of type up&zero, and n2 is the number of type

vwhere αV− high and αV− low are constants. Rm,t and RV− low V− high
are average down&zero.
m,t
market returns in high and low volatility markets corresponding to time Z statistics is defined as follows:
V− high V− low V− high
t, respectively. Rm and Rm are arithmetic mean of Rm,t and Z=
R+c− μ
(13)
V− high
V− high V− high σ
RV−
m,t
low
overtime. γ1 γ2 , , γ3 V− low
and γ1 , γ2V− low V− low
, γ3 are co­
V− high
efficients to be estimated. CSADt− 1 and CSADV− t− 1
low
are lagged terms of where R is the total amount of runs for n1 and n2 . If R < μ, c is 0.5.
CSADt
V− high
and CSADt V− low
. The significantly negative coefficients γ2
V− high Otherwise, c is − 0.5. σ is the standard deviation.
V− low Furthermore, we measure herding intensity in eight carbon markets
and γ 2 indicate the existence of herding behavior in China’s carbon
based on the method proposed by Patterson and Sharma [40], which has
markets, and vice-versa.
been widely adopted to explore investors’ herding behavior in EU car­
bon market [32], Portuguese stock market [33] and Indian stock market
2.3. Estimates of herding behavior and herding intensity in China’s eight [34].
carbon markets The statistic χ (I, J, T) is defined as follows:
(rI + 1/2) − MpI (1 − pI )
An appropriate method of measuring the presence of herding χ (I, J, T) = √̅̅̅̅̅ (14)
behavior in China’s eight carbon markets is to study the evolution sign of M
carbon price changes. When herding occurs, we observe a series of
where I is three types of positive (up), negative (down), and zero returns
transactions where an upward or downward trend in price changes is
(zero). J is the carbon market. T is the trading day. 1/2 is the parameter
enacted. Runs is defined as a sequence of one or more types of signs,
to adjust for discontinuity. rI is the number of runs from type I (up,
followed by different signs or no sign at all [32,33]. For example, when
down, and zero). M is the total amount of trading days. pI is the pro­
carbon price continues to rise (fall) till the price changes in the reverse
portion of rI to the total amount of runs. χ (I, J, T) is normally distributed
direction, an up (down) run is generated.
with mean zero. The variance is defined as follows:
Calculating the sequences of returns by Eq. (2), we observe that
returns are positive when prices rise, returns are negative when prices σ 2 (I, J, T) = pI (1 − pI ) − 3p2I (1 − pI )2 (15)
fall, and returns are zero when prices repeat. Therefore, we formulate
two classification criteria [32]. The first criterion divides the price se­ The herding intensity is defined as follows:
quences into three types of positive price changes (up), negative price χ (I, J, T)
changes (down), and price repeats (zero). The second criterion distin­ H(I, J, T) = √̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅→N(0, 1) (16)
σ2 (I, J, T)
guishes the sequences in two types, i.e. positive price changes permitting
price repetitions (up&zero), and negative price changes permitting price where H(I, J, T) is normal distribution with mean of 0 and variance of 1.
repetitions (down&zero). We conduct a randomness test on the total We adopt the runs test to measure the randomness of carbon price
sequences [33]. If the price sequence is random, indicating that no
Table 1
Samples of China’s eight carbon markets.
Table 2
Carbon markets Intervals Observations
Samples of China’s overall carbon market.
Beijing 2013.11.28–2021.3.23 1108
Carbon markets Intervals Observations
Guangdong 2013.12.19–2021.3.23 1477
Shanghai 2013.12.19–2021.3.23 1080 Sample Beijing, Guangdong, 2014.6.19–2021.3.23 1631
Shenzhen 2013.6.19–2021.3.23 1417 1 Shanghai, Shenzhen, Hubei,
Hubei 2014.4.2–2021.3.23 1650 Tianjin, Chongqing
Chongqing 2014.6.19–2021.3.23 567 Sample Beijing, Guangdong, 2017.1.9–2021.3.23 1010
Tianjin 2013.12.26–2021.3.23 668 2 Shanghai, Shenzhen, Hubei,
Fujian 2017.1.9–2021.3.23 541 Tianjin, Chongqing, Fujian

Notes: Presents samples of China’s eight carbon markets from their openings to Notes: Presents samples of China’s overall carbon market under two intervals.
March 23, 2021. Observations on the number of sequences of daily closing Observations on the number of sequences of daily closing carbon prices and
carbon prices and trading volume are collected. Data are obtained from China trading volume are collected. Data are obtained from China carbon emissions
carbon emissions trading website: http://k.tanjiaoyi.com/. trading website: http://k.tanjiaoyi.com/.

4
X. Zhou et al. Applied Energy 308 (2022) 118313

Table 3
Descriptive statistics of CSAD models.
Variables Mean Standard Deviation Skewness Kurtosis Jarque-Bera ADF test

Sample 1 CSADt 0.0791 0.0830 4.7846 37.0026 84795.04*** − 10.4891***

⃒ ⃒
(2014.6.19–2021.3.23) ⃒Rm,t ⃒ 0.0319 0.0337 3.0158 18.3952 18579.38*** − 35.5409***
( )
Rm,t 2 0.0021 0.0065 9.6313 130.9527 1137821*** − 33.9422***
( )
Rm,t − Rm 2 0.0021 0.0065 9.6142 130.3976 1128100*** − 33.9371***
Sample 2 CSADt 0.0658 0.0499 3.5809 24.4396 21502.26*** − 26.9919***
⃒ ⃒
(2017.7.31–2021.3.23) ⃒Rm,t ⃒ 0.0265 0.0258 3.0088 15.4457 7735.52*** − 19.8632***
( )
Rm,t 2 0.0014 0.0036 8.2887 92.3503 347536.5*** − 29.0425***
( )
Rm,t − Rm 2 0.0014 0.0036 8.2880 92.3182 347292.8*** − 29.0452***
⃒ ⃒ ( ) ( )
Notes: Reports the mean, standard deviation, skewness, kurtosis of the CSADt , ⃒Rm,t ⃒, Rm,t 2 , and Rm,t − Rm 2 in China’s overall carbon market under two samples. The
Jarque-Bera statistics are tested for normality. The ADF unit root test is tested for stationarity. *** represents the significance level at 1%.

Table 4
Estimates of herding behavior in China’s overall carbon market.
Variable γ2 /γ3 Standard Deviation t-value p-value Adjusted R2 DW value

Panel A: Regression results of CSAD on market returns

( )
Sample 1 Rm,t 2 4.2756 0.3322 12.8705*** 0.0000*** 0.7211 1.8134
(2014.6.19–2021.3.23)
( )
Sample 2 Rm,t 2 5.5737 0.4682 11.9056*** 0.0000*** 0.7177 1.7417
(2017.7.31–2021.3.23)

Panel B: Regression results of modified CSAD on market returns

( )
Sample 1 Rm,t − Rm 2 4.2822 0.3343 12.8079*** 0.0000*** 0.7234 2.0137
(2014.6.19–2021.3.23) AR(1) 0.0952 0.0248 3.8314*** 0.0001*** 0.7234 2.0137
( )
Sample 2 Rm,t − Rm 2 5.5846 0.4708 11.8627*** 0.0000*** 0.7275 2.0063
(2017.7.31–2021.3.23) AR(1) 0.0304 0.0318 0.9540 0.3403 0.7275 2.0063
⃒ ⃒ ( )
Notes: Panel A reports results of the CSAD model in Eq. (4): CSADt = α + γ1 ⃒Rm,t ⃒ + γ2 Rm,t 2 + εt . Panel B reports results of the modified CSAD model in Eq. (5):
⃒ ⃒ ( )2
CSADt = α + γ1 ⃒Rm,t ⃒ + γ2 Rm,t − Rm + γ3 CSADt− 1 + εt . The negative value of γ2 indicates the existence of herding behavior, and the positive value of γ2 indicates no
existence of herding behavior. All estimates are calculated by Newey-West heteroscedasticity and autocorrelation consistent standard errors. DW values examine the
first-order autocorrelation of the residual sequence. *** represents the significance level at 1%.

herding behavior exists in the market, and vice-versa [32]. H(I, J, T) is
adopted to measure the herding intensity. The more negative H(I, J, T)
is, the greater the herding intensity is.
3. Data
Up till now, eight pilot carbon markets such as Beijing, Guangdong,
Shanghai, Shenzhen, Hubei, Chongqing, Tianjin, and Fujian have been
launched in China at different times. The samples of eight carbon mar­
kets from their openings to March 23, 2021 are shown in Table 1. The
dataset consists of the daily closing prices and trading volumes. All the
data are obtained from China carbon emissions trading website:
http://k.tanjiaoyi.com/. It is worth noticing that since June 19, 2013,
there have been different transaction products in Shenzhen carbon
market per year, named as SZA-2013, SZA-2014, SZA-2015, SZA-2016,
SZA-2017, SZA-2018, and SZA-2019 respectively. Considering the data
availability and reliability, samples in Shenzhen carbon market are
selected from trading products with good trading conditions. From June
19, 2013 to August 5, 2014, we adopt SZA-2013, and from August 6,
2014 to July 13, 2015, we adopt SZA-2014. From July 14, 2015 to
August 31, 2016, we adopted SZA-2015, from September 1, 2016 to
December 28, 2018, we adopt SZA-2016, and from December 29, 2018
to March 23, 2021, we adopt SZA-2017.
China’s overall carbon market takes the eight pilot carbon markets as
a whole. For the samples of China’s overall carbon market, we divide the
following two samples from the different transaction times of eight
carbon markets, as shown in Table 2. Among Beijing, Guangdong,
Shanghai, Shenzhen, Hubei, Chongqing, and Tianjin seven carbon
markets that are established early, Chongqing market opened on June
19, 2014. Thus, sample 1 covers seven carbon markets from June 19,
2014 to March 23, 2021, with a total number of 1631 valid daily
observations. On January 9, 2017, Fujian carbon market opened.
Therefore, sample 2 covers eight carbon markets including Fujian car­
bon market from January 9, 2017 to March 23, 2021, with a total
number of 1010 daily valid observations.
4. Results and discussion
4.1. Descriptive statistics
Table 3 reports the descriptive statistics of mean, standard deviation,
skewness, kurtosis, and Augmented Dickey-Fuller (ADF) unit root tests
of CSAD and market returns in China’s overall carbon market under two
samples. The mean values of CSADt are 0.0791 and 0.0658, and the
( )
mean values of Rm,t − Rm 2 are 0.0021 and 0.0014 under sample 1 and
sample 2, respectively. The standard deviations of CSADt in the two
samples are 0.0830 and 0.0499, demonstrating small fluctuations. The
skewness statistics of CSAD and market returns are larger than 0, and the
kurtosis statistics are larger than 3. The Jarque-Bera test statistics are all
statistically significant at 1%, which rejects the null hypothesis of
normal distribution for the CSAD series. The test statistics of ADF tests of
all variables are less than the critical value at 1% under two samples,
indicating that the market returns and CSAD series are significantly
stationary in China’s overall carbon market.
4.2. Results of market herding
Table 4 A and B report the results of herding using Eqs. (4) and (5),
respectively. The Ordinary Least Squares (OLS) method is adopted for
regression analysis [10]. Panel A presents the results of the CSAD model.
The Durbin-Watson (DW) values in panel A are less than 2 under the two

5
X. Zhou et al. Applied Energy 308 (2022) 118313

Table 5
Summary of herding asymmetry in China’s overall carbon market.
Variable Coefficient Standard Deviation t-value p-value Adjusted R2 DW value F-statistic

Panel A: Asymmetric effect of market return

γup
2
5.8892 0.5970 9.8654*** 0.0000*** 0.7056 2.0059 4.5776
AR(1) 0.0953 0.0348 2.7410*** 0.0063*** 0.7056 2.0059 (0.0011)***
γdown
2
3.7606 0.3868 9.7232*** 0.0000*** 0.7476 2.0105
AR(1) 0.1334 0.0352 3.7926*** 0.0002*** 0.7476 2.0105

Panel B: Asymmetric effect of market transaction volume

γ
high 2.1040 0.7068 2.9768*** 0.0031*** 0.6982 1.9927 5.9063
2
AR(1) − 0.0300 0.0490 − 0.6120 0.5409 0.6982 1.9927 (0.0001)***
γlow
2
4.6010 0.3826 12.0256*** 0.0000*** 0.7330 2.0148
AR(1) 0.1365 0.0288 4.7406*** 0.0000*** 0.7330 2.0148

Panel C: Asymmetric effect of market volatility

γV− high 3.4993 0.6538 5.3523*** 0.0000*** 0.6934 2.0528 1.9528
2
AR(1) 0.1317 0.0380 3.4665*** 0.0006*** 0.6934 2.0528 (0.0993)*
γV−
2
low 16.8765 13.6298 1.2382 0.2160 0.1078 2.0247
AR(1) 0.0840 0.0326 2.5740** 0.0102*** 0.1078 2.0247

Notes: Panel A reports results of the following models in Eqs. (6) and (7):
⃒ up ⃒ up ( up up )2
CSADupt = α
up
+ γup
1 Rm,t + γ 2 Rm,t − Rm
⃒ ⃒ + γup up
3 CSADt− 1 + εt .
⃒ ⃒ ( )
down down down ⃒ down ⃒ down down down 2
CSADt =α + γ1 ⃒Rm,t ⃒ + γ2 Rm,t − Rm + γdown
3 CSADdown
t− 1 + εt .

Panel B reports the results of the following models in Eqs. (8) and (9):
⃒ ⃒ ( )
high high ⃒ high ⃒ high high high high high
CSADt = αhigh + γ1 ⃒Rm,t ⃒ + γ2 Rm,t − Rm 2 + γ3 CSADt− 1 + εt .
⃒ ⃒ ( )
⃒ low ⃒ low 2
CSADlow
t = αlow + γlow
1 ⃒Rm,t ⃒ + γ2
low
Rlow
m,t − Rm + γlow low
3 CSADt− 1 + εt .

Panel C reports the results of the following models in Eqs. (10) and (11):
⃒ ⃒ ( )
V− high V− high ⃒ V− high ⃒ V− high V− high V− high 2 V− high V− high
CSADt = αV− high + γ1 ⃒Rm,t ⃒ + γ2 Rm,t − Rm + γ3 CSADt− 1 + εt .
⃒ ⃒ ( )
low ⃒ V− low ⃒ V− low 2
CSADV−
t
low
= αV− low + γV−
1 ⃒Rm,t ⃒ + γV− 2
low
RV−
m,t
low
− Rm + γV−
3
low
CSADV− t− 1
low
+ εt . Numbers in parentheses are p-values, calculated by Newey-West hetero­
scedasticity and autocorrelation consistent standard errors. F-statistics in panels A, B and C illustrate the results of the null hypothesis that, γup down
2 =γ 2 , γhigh low
2 =γ 2
V− high
andγ2 = γV−
2
low
. *, **, *** represent the significance levels at 10%, 5%, and 1%, respectively.

samples, indicating that the CSAD model is autocorrelated. Since DW
values can only examine the first-order autocorrelation of the residual
sequence, which cannot test for higher-order. Therefore, the Lagrange
Multiplier (LM) test is adopted, and the lagged term CSADt is introduced
( )
to reduce autocorrelation. Moreover, R2m,t is replaced by Rm,t − Rm 2 to
reduce multicollinearity. Panel B presents the results of the modified
CSAD model. By introducing the lagged term, all the tests are adjusted
with AR (1). The DW values are close to 2, showing that the autocor­
relation of the modified CSAD model has been eliminated. Furthermore,
the adjusted R2 is higher than before, demonstrating that the modified
CSAD model has a better explanation for market deviations. γ2 is the
( )
coefficient of Rm,t − Rm 2 , the negative value of γ 2 indicates the pres­
ence of herding behavior. In panel B, γ 2 are 4.2822 and 5.5846 under
two samples, which are positive and statistically significant at the level
of 1%, indicating that no herding behavior exists in China’s overall
carbon market. The empirical results are in line with the previous
studies on the exploration of the herding in overall energy markets.
BenMabrouk and Litimi [19] demonstrated that no herding behavior
exists in US energy markets. Chang et al. [21] identified the absence of
herding behavior in global energy markets. Previous studies have pro­
vided a good reference for our research, which makes our empirical
results more reliable. Thus, we conclude that no herding behavior exists
among carbon market investors in China, and the correlations between
eight carbon markets are relatively weak, information cannot spread
between markets timely. In the following research, the modified CSAD
model is adopted.
4.3. Results of herding asymmetry
Table 5 A, B, and C present the summary of herding asymmetry in
China’s overall carbon market under sample 1 (2014.6.19–2021.3.23).
Panel A reports the asymmetric effect of market return. The adjusted R2
are 0.7056 and 0.7476, showing that the model with a high goodness of
fit. DW values are 2.0059 and 2.0105, indicating that the autocorrela­
tion of the model has been eliminated. γ up down
2 and γ 2 are 5.8892 and
3.7606, which are positive and statistically significant at the significance
level of 1%, demonstrating that no herding behavior exists in both up
and down markets. The results we have obtained contradict BenMab­
rouk and Litimi [19] and Chang et al. [21]. BenMabrouk and Litimi [19]
demonstrated that herding behavior in the oil market is more prominent
in downturns than in upturns, and Chang et al. [21] identified that in­
vestors are more likely to herd in energy markets of low oil returns.
Panel B reports the asymmetric effect of market transaction volume. The
adjusted R2 are 0.6982 and 0.7330, showing a high level of goodness of
fit in the model. DW values are 1.9927 and 2.0148, which are close to 2
high
and without autocorrelation. γ2 and γlow 2 are 2.1040 and 4.6010, which
are positive and statistically significant at the significance level of 1%,
showing that no herding behavior exists in markets with high and low
transaction volume. Our result contradicts BenMabrouk and Litimi [19],
who proved that herding occurs in the energy market with high trading
volume. Panel C reports the asymmetric effect of market volatility. The
adjusted R2 are 0.6934 and 0.1078. Between these two values, 0.1078 is
relatively low, indicating the goodness of fit of the model in the low
market return market is not high. DW values are 2.0528 and 2.0247.
These two values are close to 2, which indicates that there3 is no
V− high
autocorrelation. γ 2 is 3.4993, which is positive and statistically
significant at the level of 1%, demonstrating that no herding behavior
exists in the market with high volatility. In the market with low vola­
tility, γ V−
2
low
is not statistically significant, showing no evidence of
herding behavior. In summary, there has been no herding asymmetry in
China’s overall carbon market so far. While, BenMabrouk and Litimi
[19] demonstrated that herding behavior was lower in the energy

6
X. Zhou et al. Applied Energy 308 (2022) 118313

Table 6
Robustness test results of the modified CSAD model.
Variable γ2 /γ3 /γ4 Standard Deviation t-value p-value Adjusted R2 DW value
( )2
Sample 1 Rm,t − Rm 4.2813 0.3344 12.8018*** 0.0000*** 0.7232 2.0136
(2014.6.19–2021.3.23) AR(1) 0.0945 0.0249 3.8010*** 0.0001*** 0.7232 2.0136
ΔVt − 3.46E-06 9.96E-06 − 0.3476 0.7282 0.7232 2.0136
( )
Sample 2 Rm,t − Rm 2 5.5755 0.4709 11.8396*** 0.0000*** 0.7174 2.0060
(2017.7.31–2021.3.23) AR(1) 0.0288 0.0319 0.9056 0.3654 0.7174 2.0060
ΔVt − 6.64E-06 8.38E-06 − 0.7922 0.4285 0.7174 2.0060
⃒ ⃒ ( )
Notes: Table 6 reports results of the model in Eq. (18): CSADt = α + γ1 ⃒Rm,t ⃒ + γ2 Rm,t − Rm 2 + γ3 CSADt− 1 + γ4 ΔV + εt . The negative value of γ2 indicates the
existence of herding behavior, and the positive value of γ2 indicates no existence of herding behavior. P-values are calculated by Newey-West heteroscedasticity and
autocorrelation consistent standard errors. *** represents the significance level at 1%.

Table 7
Frequency analysis results of runs test lengths in China’s eight carbon markets.
Carbon markets Type 1 (%) 2 (%) 3 (%) 4 (%) 5 (%) ⩾6(%) Total (%)

Beijing up & zero 25.04 11.58 6.47 3.38 1.70 1.93 50.10
down & zero 28.48 13.43 3.55 2.21 0.02 2.21 49.90
Total 53.52 25.01 10.02 5.59 1.72 4.14 100.00
Chongqing up & zero 18.78 12.21 6.57 4.23 3.29 4.70 49.78
down & zero 24.41 10.80 4.23 4.69 1.41 4.68 50.22
Total 43.19 23.01 10.80 8.92 4.70 9.38 100.00
Fujian up & zero 23.11 8.44 10.67 2.22 2.22 3.11 49.77
down & zero 25.33 9.78 6.22 2.22 1.78 4.90 50.23
Total 48.44 18.22 16.89 4.44 4.00 8.01 100.00
Guangdong up & zero 25.92 11.58 5.13 3.42 1.84 2.12 50.01
down & zero 26.71 12.50 6.71 1.84 1.45 0.78 49.99
Total 52.63 24.08 11.84 5.26 3.29 2.90 100.00
Hubei up & zero 29.43 10.89 4.52 2.67 1.04 1.50 50.05
down & zero 25.49 12.98 5.68 1.97 1.51 2.32 49.95
Total 54.92 23.87 10.20 4.64 2.55 3.82 100.00
Shanghai up & zero 22.38 12.30 6.65 4.03 2.02 2.61 49.99
down & zero 24.40 13.91 5.65 2.62 1.41 2.02 50.01
Total 46.78 26.21 12.30 6.65 3.43 4.63 100.00
Shenzhen up & zero 29.54 11.25 5.56 1.49 0.95 1.19 49.98
down & zero 26.15 11.38 5.83 2.98 1.50 2.18 50.02
Total 55.69 22.63 11.39 4.47 2.45 3.37 100.00
Tianjin up & zero 23.40 10.90 6.09 5.45 2.56 1.60 50.00
down & zero 23.40 12.82 6.73 3.53 2.24 1.28 50.00
Total 46.80 23.72 12.82 8.98 4.80 2.88 100.00

Notes: Reports pI (%), the proportion of each type for the given length. Type up&zero represents a sequence of positive price changes permitting price repetitions. Type
down&zero represents a sequence of negative price changes permitting price repetitions.

market during periods of high market volatility, which contradicts our

study. F-statistic tests the consistency of herding behavior in markets. Table 8
high V− high Runs test results of China’s eight carbon markets.
The null hypothesis is that γup down
2 =γ 2 , γ2 =γlow
2 = γV−
andγ2 2
low
. The
Carbon markets n1 /n2 p-value Herding Intensity
rejection of the null hypothesis indicates that the herding behavior with
Z

a significant coefficient is more obvious than that with an insignificant Beijing 606/501 2.2441 0.0248** 2.1340
coefficient. Our results show that there is no herding asymmetry in Chongqing 302/264 − 5.851 0.0000*** − 5.8840
Fujian 270/270 − 3.9197 0.0000*** − 3.8724
China’s overall carbon market, thus the values of F-statistic do not need
Guangdong 776/700 1.1726 0.2410 1.1973
to be further analyzed. Hubei 792/857 1.8889 0.0589 1.9947
Shanghai 576/503 − 2.5415 0.0110** − 2.5877
Shenzhen 654/762 1.7444 0.0811 1.6476
4.4. Robustness tests Tianjin 342/325 − 1.6893 0.0912 − 1.5875

To verify the rationality of the modified CSAD model and check the
reliability of our herding results, the robustness tests are conducted on
the CSAD models in China’s overall carbon market under two samples.
The trading volume is an important indicator in aqddition to price and
return, which has significant impact on investors in the carbon market.
Therefore, the change rate of trading volume ΔVt is introduced as the
independent variable into the model to explore herding behavior. ΔVt is
defined as follows:
ΔVt = (Vt − Vt− 1 )/Vt
where Vt is the trading volume on day t, Vt− 1 is the trading volume on
day t − 1. Thus, a new robustness test model is established as follows:
Notes: Shows results of runs tests, where the null hypothesis is that sequence of n
elements of two types is random. n1 is the number of type up&zero, n2 is the
number of type down&zero. The statistic Z follows a normal distribution. **, ***
indicate the significance levels at 5% and 1%, respectively.
⃒ ⃒ ( )
CSADt = α + γ 1 ⃒Rm,t ⃒ + γ2 Rm,t − Rm 2 + γ 3 CSADt− 1 + γ 4 ΔV + εt (18)
Table 6 presents the robustness test results in China’s overall carbon
market. γ2 is positive at the significance level of 1%, indicating that there
(17) is no herding behavior. Investors in China’s overall carbon market do
not have irrational behaviors. The results are consistent with the herding
results in the modified CSAD models, demonstrating that the model we

7
X. Zhou et al.
Fig. 1. Price fluctuations in carbon markets with herding behavior.
Fig. 2. Price fluctuations in carbon markets without herding behavior.
have constructed is robust.
4.5. Results of herding behavior and herding intensity in China’s eight
carbon markets
Herding behavior occurs when market traders trade in the same di­
rection [33,34]. Carbon price is an important predictor of herding
behavior, indicating that herding behavior occurs when carbon prices
continue to rise or fall. With the changes in carbon prices, we can
evaluate and determine the existence of herding behavior in the carbon
market. Therefore, we analyze the frequency of runs test lengths in eight
carbon markets under three types of prices rise, fall, and repetition (up,
down, and zero). Table 7 reports the frequency analysis results. It shows
that among eight carbon markets the length 1 for runs test lengths is the
most common, accounting for 50%. For the total proportion of runs
lengths greater than 6, Chongqing market is the highest, reaching
9.38%, of which type up&zero accounts for 4.70% and type down&zero
accounts for 4.68%, respectively. It indicates that carbon prices in
Chongqing rise and fall continuously. Fujian is second to Chongqing,
accounting for 8.01%. Shanghai and Beijing are relatively high, at
4.63% and 4.14%, respectively. In contrast, Hubei, Shenzhen, Guang­
dong, and Tianjin have a lower frequency of continuous prices rise and
fall, at 3.82%, 3.37%, 2.90%, and 2.88%, respectively. The higher
proportion of run lengths greater than 6 in the market, indicating the
higher frequency of carbon prices continuously rising or falling. When
the market is prevalent with this phenomenon, traders tend to mimic
8
Applied Energy 308 (2022) 118313
other traders’ behaviors, thus leading to herding behavior.
After the frequency analysis, we perform runs test at the 5% signif­
icance level, as shown in Table 8. The null hypothesis is that sequence of
n elements of two types follows a random distribution. The rejection of
the null hypothesis indicates that the sequence does not obey the
random distribution and there exists a herding behavior, and vice-versa.
As the p-values show, Beijing and Shanghai reject the null hypothesis at
the significance level of 5%. Chongqing and Fujian reject the null hy­
pothesis at the level of 1%, indicating that the price sequences of four
markets are nonrandom. Thus, herding behavior exists in Beijing,
Shanghai, Chongqing, and Fujian carbon markets. The result is consis­
tent with Palao and Pardo [32], who demonstrated the existence of
herding behavior in EU carbon market due to the lack of randomness in
the sequences of positive or negative changes in prices. In contrast, p-
values in Guangdong, Hubei, Shenzhen, and Tianjin are not statistically
significant, the null hypothesis can not be rejected, which demonstrates
that the price sequences of four carbon markets are random. Thus, no
herding behavior exists in Guangdong, Hubei, Shenzhen, or Tianjin. The
herding intensity indicates the degree of herding behavior. The larger
negative value of herding intensity, the greater herding behavior. The
negative value of herding intensity in Chongqing is the largest, with
− 5.8840, indicating that the herding behavior is the strongest. Followed
by Fujian and Shanghai, with − 3.8724 and − 2.5877, respectively. The
herding intensity in Beijing carbon market is the lowest. From the pre­
vious studies, herding intensity is closely correlated with market vola­
tility [16]. To accurately judge the correlation between herding
X. Zhou et al.
Fig. 3. Comparisons of price fluctuations between carbon markets with and without herding behavior.
intensity and volatility, we calculate the carbon prices amplitudes of
four carbon markets with herding behavior. The results show that car­
bon price amplitude in Beijing reached 311.84% from November 28,
2013 to March 23, 2021. The price amplitudes of Fujian and Shanghai
were 488.04% and 1090%, during the periods from January 9, 2017 to
March 23, 2021, and from December 19, 2013 to March 23, 2021,
respectively. Chongqing carbon market’s price amplitude reached
4652% from June 19, 2014 to March 23, 2021, which is the highest.
Thus, we conclude that carbon market herding intensity is positively
correlated with carbon market volatility, which is consistent with Palao
and Pardo [32], who proved that herding increases EU carbon market
volatility.
To accurately judge the herding intensity based on the characteristics
of carbon prices, we plot the valid transaction carbon prices with
herding behavior and without herding behavior, as shown in Figs. 1 and
2. Carbon prices fluctuate greatly in Chongqing, Fujian, Shanghai, and
Beijing carbon markets with herding behavior, with a high frequency of
prices continuously rising and falling. In contrast, carbon prices are
stable with relatively small fluctuations in Tianjin, Hubei, Guangdong,
and Shenzhen carbon markets without herding behavior, with a low
frequency of prices continuously rising and falling. In summary, carbon
prices fluctuate greatly in the markets with herding behavior, and car­
bon prices are stable with relatively small fluctuations in the markets
without herding behavior.
To compare the differences between carbon markets with and
without herding behavior, we draw the carbon market prices Pi,t (Yuan/
ton) of Chongqing, Fujian, Shanghai, and Beijing with herding behavior
and Guangdong without herding behavior, respectively, as shown in
9
Applied Energy 308 (2022) 118313
Fig. 3. The reason for choosing Guangdong carbon market is as follows.
Compared with the other three carbon markets without herding
behavior, Guangdong carbon market is established early and its trading
data are more complete.
As Fig. 3 shows, Guangdong carbon market prices range from 8.1
yuan/ton to 77 yuan/ton. Chongqing and Fujian carbon prices fluctuate
from 1 yuan/ton to 47.52 yuan/ton and from 7.19 yuan/ton to 42.28
yuan/ton. Shanghai carbon prices fluctuate from 4.2 yuan/ton to 49.98
yuan/ton, and Beijing carbon prices fluctuate from 25 yuan/ton to
102.96 yuan/ton. Compared with Guangdong carbon market, the four
carbon markets with herding behavior have a more obvious and sus­
tainable trend for both carbon price rising and falling. It confirms that
carbon price fluctuation is one of the important factors affecting herding
behavior.
Herding intensity depends on market conditions. The frequency
analysis shows that the total proportion of the runs lengths of 6 or more
is higher in Chongqing, Fujian, Shanghai, and Beijing carbon markets,
indicating that their carbon prices rise and fall sharply and fluctuate
greatly, as shown in Fig. 1. In this case, when investors lack sufficient
market information, it is easy for them to blindly follow the trend, and
thus causing herding behavior. In Fig. 3 (d), we observe that Beijing
carbon prices dropped sharply from 95 yuan/ton to 25 yuan/ton, during
the period from September 22, 2020 to March 23, 2021. Since the
opening of Beijing carbon market, the carbon price has been the highest
among eight pilot carbon markets. In 2020, the average annual carbon
price exceeded 50 yuan/ton, the average online transaction price
reached 89 yuan/ton, and the highest price exceeded 100 yuan/ton. The
reasons for price falling are as follows. Firstly, the previously higher
X. Zhou et al. Applied Energy 308 (2022) 118313

carbon price increases the cost of carbon emission reduction. Enterprises Table 9
in Beijing decrease energy consumption in the process of production and Abbreviations and model parameters.
operation, thus reducing carbon emissions. In this condition, the pres­ Nomenclature
sure of emission reduction in Beijing carbon market has been reduced.
Abbreviations Paraphrase
Therefore, there is less demand for carbon quotas in the secondary
market, hence carbon price decreases. Secondly, driven by carbon ADF Augmented Dickey-Fuller
CAPM Capital asset pricing model
emissions peak and carbon–neutral targets since September 22, 2020, CSAD Cross-sectional absolute deviation
and affected by COVID-19, the carbon emissions of enterprises have CSSD Cross-sectional standard deviation
decreased, resulting in a decrease in carbon price. Thirdly, the imple­ DW Durbin-Watson
mentation of Beijing carbon market quota transactions is due on June EU European Union
GHG Greenhouse gas
27. On the eve of the implementation, trading volume is large, subse­
LM Lagrange Multiplier
quently, the trading volume declines and the carbon price falls. OLS Ordinary Least Squares
Among them, Chongqing carbon market has the highest herding US United States
intensity. Because a large number of transactions are concentrated on Indices
the eve of the implementation in Chongqing, indicating that herding c If R < μ, c is 0.5. Otherwise, c is − 0.5
intensity is much higher when carbon prices sharply fluctuate with a M Total amount of trading days
large transaction volume. By contrast, Tianjin, Hubei, Guangdong, and n1 Number of the type up&zero
Shenzhen carbon markets have comparatively lower lengths of 6 or n2 Number of the type down&zero
more, and no herding behavior exists in the four markets. We observe n Total amount of n1 and n2
that the frequency analysis results are consistent with the runs test re­ N Number of carbon markets
sults presented above. It confirms that herding behavior is prone to t Trading day
occurrence when carbon prices continuously rise or fall, and is greater i Carbon market
when prices rise and fall with a high transaction volume. Carbon market I Three types of positive (up), negative (down), and zero returns (zero)
volatility is positively correlated with herding intensity. J Carbon market
R Total amount of runs for n1 and n2
5. Conclusions and policy implications T Trading day
μ Mean
Inspired by the theory of “herding behavior” in behavioral finance, σ2 Variance
we introduce a modified cross-sectional absolute deviation model and σ Standard deviation
runs test to explore the existence and asymmetry of herding behavior in
China’s carbon markets. The main conclusions are as follows. Firstly, the Variables
CSADt Cross-sectional absolute deviation of carbon markets on trading day
modified cross-sectional absolute deviation results show that there is no
t, the measure of market return dispersion
herding behavior and herding asymmetry in China’s overall carbon
CSADt− 1 Lagged term of CSADt
market. Secondly, the runs test results show that the herding behavior
CSADup The measure of market return dispersion in up market on trading
exists in four carbon markets such as Beijing, Shanghai, Chongqing, and t
day t
Fujian, and Chongqing has the highest herding intensity. Thirdly, CSADup Lagged term of CSADup
t− 1 t
herding behavior is prone to occurrence when the carbon market is The measure of market return dispersion in down market on trading
CSADdown
highly volatile. When the carbon market is highly volatile with a large
t
day t
transaction volume, herding intensity is higher. Herding behavior is CSADdown Lagged term of CSADdown
t− 1 t
positively associated with carbon price volatility. high Trading volume of t day higher than the moving average of the last
CSADt
To sum up, herding behavior in China’s overall carbon market has 30 days
not yet occurred. From the perspective of eight carbon markets, herding CSADt−
high
Lagged term of CSADt
high
1
behavior exists in Beijing, Shanghai, Chongqing, and Fujian with large CSADlow Trading volume of t day lower than the moving average of the last
t
price fluctuations, while no herding behavior exists in Guangdong, 30 days
Hubei, Shenzhen, and Tianjin with small price fluctuations. The reasons CSADlow
t− 1 Lagged term of CSADlow
t
why herding behavior does not exist in China’s overall carbon market V− high
CSADt Market volatility of t day higher than the moving average of the last
are as follows. Firstly, eight carbon markets are independent with weak 30 days
correlations, thus the irrational behavior is poorly transmitted among CSADt−
V− high
1 Lagged term of CSADt
V− high

investors. Secondly, as a government-led market, transactions in China’s CSADV− low Market volatility of t day lower than the moving average of the last
t
carbon markets are less driven by the market and are greatly influenced 30 days
by the government, which can avoid irrational investment behaviors to CSADV−
t− 1
low
Lagged term of CSADV−
t
low

some extent. The reasons for the herding behavior in eight carbon Pi,t Closing prices of carbon market i on trading day t
markets are summarized as follows. Firstly, the carbon market operating Pi,t− 1 Closing prices of carbon market i on trading day t − 1
mechanism is not sound. China’s carbon market has been established for pI Proportion of rI to the total amount of runs
the short-term, the market is immature and with high policy uncer­ Ri,t Logarithmic return of carbon market i on trading day t
tainty, irrational factors are spawned in the process of information Rm,t Cross-sectional equal-weighted mean returns on trading day t of all
dissemination. Secondly, investors lack investment experience. In the the carbon markets
case of insufficient market information, investors are susceptible to
⃒ ⃒
⃒Rm,t ⃒ Absolute value of Rm,t
emotion and have a herd mentality, which easily leads to investors’ Rm Arithmetic mean of Rm,t overtime
cognitive bias. Thirdly, Beijing, Shanghai, Chongqing, and Fujian carbon ( )
Rm,t 2 Squared market return
prices fluctuate greatly, which are manifested in the high frequency of Rup Average market returns in up markets corresponding to time t
m,t
prices continuously rising or falling. Due to the untimely disclosure of up
Arithmetic mean of Rup
Rm m,t overtime
market information and the cognitive biases of investors, it is easy for
Rdown Average market returns in down markets corresponding to time t
investors to follow the trend of investment, which leads to herding m,t

Rm
down
Arithmetic mean of Rdown
m,t overtime
behavior. Chongqing market has the highest herding intensity. The main
reason is that transactions in Chongqing market are concentrated on the (continued on next page)

10
X. Zhou et al. Applied Energy 308 (2022) 118313

Table 9 (continued ) still in the early stages, driven by policy and information. Thus, the in­
Nomenclature formation disclosure system should be standardized to ensure the
authenticity and completeness of market information. Moreover,
Abbreviations Paraphrase
improving the transparency of information to avoid the phenomenon of
high
Rm,t Average market returns in high trading volume markets investors blindly mimicking other investors’ investment behaviors.
corresponding to time t
Secondly, strengthening the education of individual investors in
high high
Rm Arithmetic mean of Rm,t overtime China’s carbon markets. Individual investors in carbon markets are not
Rlow
m,t
Average market returns in low trading volume markets all professional. It is necessary to guide individual investors to learn
corresponding to time t
more about investment theory and promote establishing a healthy in­
Rm
low
Arithmetic mean of Rlow
m,t overtime vestment philosophy, so as to make rational decisions and avoid blind
V− high
Rm,t Average market returns in high volatility markets corresponding to investment. Moreover, carbon market managers should guide individual
time t investors to make rational analyses of various signals sent by the mar­
kets, thus avoiding heavy losses caused by herding.
V− high
Rm Arithmetic mean of RV−
m,t
high
overtime
RV−
m,t
low Average market returns in low volatility markets corresponding to Last but not the least, improving the market transaction mechanism
time t and strengthening market supervision of China’s carbon markets. Due to
Rm
V− low
Arithmetic mean of RV−
m,t
low
overtime the imperfect carbon market mechanism, investors are prone to specu­
rI Number of runs from type I (up, down and zero) lation. Coupled with weak supervision, market risks are likely to in­
α Constant of CSADt model crease and carbon prices fluctuate more violently, thus leading to
αup Constant of CSADup
t model
herding behavior. Therefore, regulatory authorities should strengthen
αdown
Constant of CSADdown
t model supervision to crack down on illegal activities such as disclosing false
high high information. Meanwhile, enhance the ability to withstand market risks
α Constant of CSADt model
of China’s carbon markets, thus preventing the carbon market from
αlow
Constant of CSADlow model
t
fluctuation due to herding behavior. Moreover, the government should
αV− high
Constant of CSADt
V− high
model
formulate relevant laws and regulations to enhance policy transparency,
V− low
α Constant of CSADV−
t
low
model so as to form effective supervision on China’s carbon markets.
⃒ ⃒
γ1 Coefficient of Rm,t
⃒ ⃒
( )
γ2 Coefficient of Rm,t 2 Declaration of Competing Interest
γ3 Coefficient of CSADt− 1
⃒ ⃒
γup
1 Coefficient of ⃒Rup
m,t
⃒
The authors declare that they have no known competing financial
( up up )
γup
2 Coefficient of Rm,t − Rm 2 interests or personal relationships that could have appeared to influence
γup
3 Coefficient of CSADupt− 1 the work reported in this paper.
⃒ ⃒
γdown
1
⃒
Coefficient of ⃒Rdown
⃒
m,t ⃒

γdown
( )
down 2 Acknowledgements
2 Coefficient of Rdown
m,t − Rm

γdown Coefficient of CSADdown

3
⃒
t− 1
⃒ We gratefully acknowledge the funding supports of the National
high
Coefficient of ⃒Rhigh
⃒ ⃒
γ1
(
m,t ⃒
)
Natural Science Foundation of China (71771105, 71974077 and
high
γ2 Coefficient of Rhigh
high 2
m,t − Rm 72074120), and the Fundamental Research Funds for the Central Uni­
high
γ3 Coefficient of CSADt− 1
high versities (19JNKY08).
⃒ ⃒
γlow
1
⃒
Coefficient of ⃒Rlow
⃒
m,t ⃒
( ) Appendix A
γlow Coefficient of Rlow
low 2
2 m,t − Rm

γlow
3 Coefficient of CSADlow t− 1 The abbreviations, indices and variables used in Equations are
⃒ ⃒
V− high
γ1 Coefficient of ⃒RV−
⃒
m,t
high ⃒
⃒ interpreted in Table 9.
V− high
( )
V− high V− high 2
γ2 Coefficient of Rm,t − Rm
V− high V− high References
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