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

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  • Frank Venmans

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. Copyright Society for Environmental Economics and Policy Studies and Springer Japan 2015

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  • Frank Venmans, 2015. "Capital market response to emission allowance prices: a multivariate GARCH approach," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 17(4), pages 577-620, October.
    • Handle: RePEc:spr:envpol:v:17:y:2015:i:4:p:577-620
    DOI: 10.1007/s10018-015-0105-6
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