This paper aims to investigate the impact of liquidity on the return dynamics between the carbon emission trading market and the stock market in China from 2013 to 2021. In the carbon emission trading market, we find that liquidity on any given day can significantly predict the cross-section returns the next day. Furthermore, we examine the spillover effect between the two markets and find the carbon market has a greater impact on the stock market. We also find evidence that stock market liquidity can significantly improve the liquidity of the carbon market. Finally, we observe that the volatility in the stock market not only deteriorates the liquidity of the stock market but also the carbon market, where the impact for the latter is from decreasing trading volume and increasing prices.

From the perspective of investors' perception on financial market risk, we examine the performance of market search volume and market overnight sentiment in forecasting the realised volatility (RV) of the Shanghai SE Composite Index and 16 industry indexes in China. We find that market search volume has a significant positive impact on the future RV of all indexes, and market overnight sentiment also has a significantly positive coefficient for most indexes. The out-of-sample forecasting results show that the market search volume performs better than the market overnight sentiment. The predictive model based on these two sentiment-based variables has a better and more robust performance than competing models, and it performs well in predicting the three-month-ahead and six-month-ahead RVs. Our results indicate that market search volume and the market overnight sentiment have complementary market sentiment information.