Liquidity and resolution of uncertainty in the European carbon futures market

Iordanis Angelos Kalaitzoglou, Boulis Maher Ibrahim

    Research output: Contribution to journalArticlepeer-review

    10 Citations (Scopus)

    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
    Original languageEnglish
    Pages (from-to)89-102
    Number of pages14
    JournalInternational Review of Financial Analysis
    Volume37
    Issue number1
    Early online date6 Nov 2014
    DOIs
    Publication statusPublished - Jan 2015

    Keywords

    • instantaneous liquidity;
    • Marked duration
    • Temporal marked point process
    • Carbon market

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)
    • Energy(all)

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