Liquidity and resolution of uncertainty in the European carbon futures market

Iordanis Angelos Kalaitzoglou and Boulis Maher Ibrahim

International Review of Financial Analysis, 2015, vol. 37, issue C, 89-102

Abstract: We investigate whether liquidity introduces or helps resolve uncertainty in Phase I and the first year of Phase II of the European carbon futures market. We propose a distinction between ‘absolute’ or overall liquidity and that which is ‘relative’ to a benchmark. For this purpose, we suggest volume-weighted duration as a natural measure of trading intensity as a proxy for liquidity, and we model it as a rescaled temporal point process. The new model is called Autoregressive Conditional Weighted Duration (ACWD) and is shown to outperform its discrete modelling counterparts. Liquidity is found to play a dual role, with higher relative liquidity introducing uncertainty and higher absolute liquidity accelerating uncertainty resolution, thus, enhancing market efficiency.

Keywords: instantaneous liquidity; Marked duration; Temporal marked point process; Carbon market (search for similar items in EconPapers)
JEL-codes: C41 C46 G14 Q40 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:37:y:2015:i:c:p:89-102

DOI: 10.1016/j.irfa.2014.11.006

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