Trading intensity in the European Carbon market has been found to carry price relevant information, prior to price changes. In this paper we propose a natural measure of trade intensity, the weighted durations, and we model it as a rescaled point process, using the ACD (Engle and Russell, 1998) framework to model liquidity dynamics in the early stages of EU ETS. The new model is called Autoregressive Conditional Weighted Duration (ACWD) and is employed to analyse the trading behaviour of market participants with respects to trading intensity and OTC transactions, as well as intraday uncertainty resolution. The findings confirm the existence of two sources of strong momentums in trading activity and return volatility. OTC trades appear to be strategic, by entering the market when their price impact is minimum. They introduce large in magnitude uncertainty shocks that they need at least five minutes to be absorbed. In parallel, relatively higher trading intensity trades also introduce uncertainty, which is lower in magnitude and takes longer to be resolved into price. Both shocks are absorbed faster in market environments where overall liquidity is higher. This suggests that although absolute liquidity improves overall market maturity, by allowing faster uncertainty resolution, relative liquidity is still linked to higher presence of better informed agents and thus, introduces uncertainty.
