Liquidity and resolution of uncertainty in the European carbon futures market

Iordanis Angelos Kalaitzoglou and Boulis Maher Ibrahim ()
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Iordanis Angelos Kalaitzoglou: Audencia Recherche - Audencia Business School
Boulis Maher Ibrahim: HWU - Heriot-Watt University [Edinburgh]

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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: Marked duration; Instantaneous liquidity; Temporal marked point process; Carbon market (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-ene and nep-env
Note: View the original document on HAL open archive server: https://hal.science/hal-01107956
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Citations: View citations in EconPapers (10)

Published in International Review of Financial Analysis, 2015, 37, pp.89-102. ⟨10.1016/j.irfa.2014.11.006⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01107956

DOI: 10.1016/j.irfa.2014.11.006

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