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

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  • Xiaohan Cai
  • Bo Yan

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.

Suggested Citation

  • Xiaohan Cai & Bo Yan, 2025. "Tail Dependence of Liquidity and Volatility in Carbon Futures Market: Evidence From EU ETS," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 46(6), pages 3538-3570, September.
    • Handle: RePEc:wly:mgtdec:v:46:y:2025:i:6:p:3538-3570
    DOI: 10.1002/mde.4545
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    Cited by:

    1. Wu, Ran, 2025. "Forecasting the European Union allowance price tail risk with the integrated deep belief and mixture density networks," Chaos, Solitons & Fractals, Elsevier, vol. 199(P2).

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