Tail Dependence of Liquidity and Volatility in Carbon Futures Market: Evidence From EU ETS

Xiaohan Cai and Bo Yan

Managerial and Decision Economics, 2025, vol. 46, issue 6, 3538-3570

Abstract: This study constructs liquidity and volatility indicators based on the four phases of EU ETS and analyses tail dependence using Copula models. The results indicate strong tail dependence between liquidity and volatility in the fourth phase. The Amihud illiquidity ratio combined with the stochastic volatility model identifies high volatility risks during liquidity scarcity, while the Gibbs measure combined with the stochastic volatility model identifies low volatility risks. The robustness of the results is tested by classifying different periods based on structural breaks and assessing tail dependence, and by applying machine learning algorithms to remove outliers before measuring tail dependence.

Date: 2025
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https://doi.org/10.1002/mde.4545

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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:46:y:2025:i:6:p:3538-3570

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