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Capital market response to emission allowance prices: a multivariate GARCH approach

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Abstract

This study assesses the impact of European emission allowances (EUA) prices on stock prices of all companies in the StoxxEurope Total Market Index belonging to sectors regulated by the European Union Emission Trading Scheme (EU ETS). The effect of allowance prices on stock prices is found to be firm specific. For most companies, EUA prices are found to be positively correlated to stock prices of regulated companies. This is the case for all sectors. Different multivariate GARCH models, generalised least squares panel models and aggregated models are compared. We show that models which ignore covariances of the regression errors between firms are inefficient and that imposing a common carbon effect for all firms creates aggregation bias.

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Acknowledgments

I would like to thank Daniel Rittler for his valuable comments on the Conference of Computational and Financial Econometrics (London 2011), Alessio D’Amato for his comments at the EAERE conference (Prague 2012) and Luca Taschini for the discussions at the Grantham Institute on Climate Change. I’m also grateful for the helpful comments of 2 anonymous referees.

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Authors and Affiliations

  1. Grantham Institute on Climate Change and the Environment, London School of Economics and Political Science, Tower 3, Clements Inn Passage, London, WC2A 2AZ, UK

    Frank Venmans

  2. Finance Department, University of Mons, Place Waroqué 19, 7000, Mons, Belgium

    Frank Venmans

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  1. Frank Venmans
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Correspondence to Frank Venmans.

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Venmans, F. Capital market response to emission allowance prices: a multivariate GARCH approach. Environ Econ Policy Stud 17, 577–620 (2015). https://doi.org/10.1007/s10018-015-0105-6

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