Liquidity and resolution of uncertainty in the European carbon futures market

Iordanis Angelos Kalaitzoglou, Boulis Maher Ibrahim

Research output: Contribution to journalArticle

6 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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