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Liquidity and resolution of uncertainty in the European carbon futures market

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  • Kalaitzoglou, Iordanis Angelos
  • Ibrahim, Boulis Maher

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.

Suggested Citation

  • Kalaitzoglou, Iordanis Angelos & Ibrahim, Boulis Maher, 2015. "Liquidity and resolution of uncertainty in the European carbon futures market," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 89-102.
  • Handle: RePEc:eee:finana:v:37:y:2015:i:c:p:89-102
    DOI: 10.1016/j.irfa.2014.11.006
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    References listed on IDEAS

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    Cited by:

    1. Zhao, Xin-gang & Jiang, Gui-wu & Nie, Dan & Chen, Hao, 2016. "How to improve the market efficiency of carbon trading: A perspective of China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 59(C), pages 1229-1245.
    2. Julien Chevallier & Stéphane Goutte & Khaled Guesmi, 2019. "Climate finance and the restructuring of the oil-gas-coal business model under carbon asset stranding constraints," Working Papers halshs-02106113, HAL.
    3. repec:eee:eneeco:v:75:y:2018:i:c:p:249-260 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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