Université de MonsUniversité de Mons

Capital market response to emission allowance prices: a multi-variate GARCH approach.

Venmans Frank | frank.venmans@umons.ac.be | 065/37 32 13Assistant Service Finance , Faculté Waroqué d’Economie et de Gestion

AbstractThis 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 price increases (decreases) are found to have a significant positive (negative) impact on stock prices of regulated companies. The results indicate that free allocation, designed to avoid carbon leakage, but having several distortional effects, was generally over-compensating potential carbon costs during the second EU ETS period. Different multivariate GARCH models, generalized least squares panel models and aggregated models are compared showing that models who impose covariances between firms to be zero or who impose a common carbon effect for all firms are biased.

The main equation:

With:• Rstock: Closing price of ETS regulated firms in STOXX Europe TMI

(n=97). Subdivided in 7 sectors.• Rcarbon,t : EUA price (future 2012)

• rOil: Oil price

• rGas: Gas price

• rCoal: Coal price

• rPElec: Electricity baseload price

• rStoxxEurope600: Stoxx index

All variables in logreturns.From 14-08-2007 to 25-08-2011For aggregate models no firm index I and lag dependent added

The effect of carbon prices on stock prices with common βcarbon for all firms of one sector.

Between brackets (robust) standard errors. * significant at the 10% level, ** significant at the 5% level, *** significant at the 1% level according to a 2-sided t-test .

Covariance in model Covariance=0

DiagVech (1,1)M Variance targA,B indefinite

DiagVech (1,1)M scalarA,B indefinite

DiagVech (1,1)M indefiniteA,B scalar

BEKK(1,1)M indefiniteA,B diagonal

BEKK (1,1)M diagonalA,B diagonal

CCCM scalar

DiagVech (1,1)M indefiniteA,B diagonal

FGLS PanelCross-section SUR

DiagVech (1,1)M diagonalA,B diagonal

DiagVech (1,1)M diagonal constA,B diagonal const

FGLS Panel period heteroscedast

Aggregate Garch

Aggregate OLS

ElectricityN=17(oil, gas, coal, elec)

β carbon: -0.002 (0.008)Logl:51580AIC:-97.37BIC:-95.89# param:314

β carbon: -0.003 (0.009)Logl:51348AIC:-96.93BIC:-95.44# param:315

β carbon: -0.000 (0.008)Logl:51707AIC:-97.90BIC:-97.13# param:163

β carbon : -0.001 (0.007)Logl:51784AIC :-97.98BIC:-97.07# param:195

β carbon : -0.003 (0.005)Logl:51526AIC :-97.75BIC:-97.47# param:59

β carbon : 0.001 (0.007)Logl:51945AIC :-98.29BIC:-97.37# param:195

β carbon : 0.003 (0.006)Logl:51783AIC :-97.98BIC:-97.07# param:195

β carbon: 0.001 (0.009)# param:7

β carbon: 0.005 (0.003)Logl:51073AIC:-96.89BIC:-96.61# param: 59

β carbon: 0.011(0.004)**Logl: 50884AIC: BIC: # param:11

β carbon: 0.010 (0.007) 1

R²=0.23# param:7

β carbon: 0.012 (0.009)# param:11

β carbon: 0.011 (0.013)²R²=0.89# param:7

Iron&SteelN=13(oil, coal, elec)

β carbon: 0.0034 (0.012)Logl: 36223AIC:-68.4BIC:-67.5# param:189

β carbon: 0.0017 singular covarLogl:33865AIC:-63.9BIC:-63.06# param:190

β carbon: 0.0038 (0.013)Logl: 36051AIC: -68.3BIC: -67.8# param: 100

β carbon: 0.005 (0.012)Logl:36144AIC:-68.4BIC:-67.8# param:124

β carbon: -0.0005 (0.008)Logl:35890AIC:-68.1BIC:-67.8# param:46

β carbon: 0.0002 (0.012)Logl:36240AIC:-68.59BIC:-68.00# param:124

β carbon: 0.0084 (0.013)Logl:36141AIC:-68.40BIC:-67.82# param:124

β carbon : 0.018 (0.015)

β carbon: 0.020 (0.0044)***Logl:33683AIC:-63.9BIC:-63.7# param:46

β carbon: 0.024 (0.007)***Logl:33336AIC: BIC: # param:11

β carbon: 0.028 (0.013)** 1

R²= 0.45

β carbon: 0.027 (0.017)

β carbon: 0.040 (0.022)*²R²=0.75

NonferrousN=5(oil, coal, elec)

β carbon: 0.036 (0.020)*Logl:11733AIC:-23.44BIC:-23.25# param:37

β carbon: 0.035 (0.018)*Logl:11725AIC:-23.42BIC:-23.23# param:38

β carbon: 0.028 (0.018)Logl: 11682AIC: -23.36BIC: -23.24# param: 24

β carbon: 0.031 (0.018)*Logl:11701AIC:-23.38BIC:-23.22# param:32

β carbon: 0.029Logl:11684AIC:-23.37BIC:-23.26# param:22

β carbon: 0.037 (0.017)**Logl:11729AIC:-23.44BIC:-23.28# param:32

β carbon: 0.046 (0.018)***Logl:11719AIC:-23.42BIC:-23.27# param:32

β carbon : 0.040 (0.023)

β carbon: 0.038 (0.012)***Logl:11630AIC:-23.26BIC:-23.15# param: 22

β carbon: 0.035 (0.015)**Logl: 9879AIC: BIC: # param:11

β carbon: 0.026 (0.011)** 1

R²= 0.52

β carbon: 0.040 (0.021)

β carbon: 0.050 (0.026)*²R²= 0.66

Building materialsN=13(oil, coal, elec)

β carbon: -0.0028 singular covar Logl:36339AIC:-68.6BIC:-67.7# param: 189

β carbon: 0.008singular covariance Logl:35902AIC:-67.8BIC:-66.9# param: 190

β carbon: 0.0033 (0.010)Logl: 36167AIC: -68.5BIC: -68.0# param: 100

β carbon: 0.0013 (0.009)Logl:36250AIC:-68.6BIC:-68.0# param: 124

β carbon: 0.0049 (0.007)Logl:36069AIC:-68.4BIC:-68.2# param: 46

β carbon: 0.0027 (0.009)Logl:36325AIC:-68.76BIC:-68.17# param: 124

β carbon: 0.0078 (0.008)Logl:36223AIC:-68.5BIC:-67.9# param: 124

β carbon : 0.010 (0.012)

β carbon: 0.020 (0.004)*** Logl:36250AIC:-68.6BIC:-68.0# param: 46

β carbon: 0.017 (0.007)**Logl:35081AIC: BIC: # param:11

β carbon: 0.019 (0.010)** 1

R²= 0.32

β carbon: 0.019 (0.014)

β carbon: 0.019 ( 0.016)²R²= 0.76

ChemicalsN=24(oil, gas, coal, elec)

β carbon: 0.025 singular covariance Logl:66492AIC:-125.1BIC:-122.3# param:608

β carbon: 0.023 (0.021)Logl:63402AIC:-119.27BIC:-116.40# param:609

β carbon: 0.013 (0.009)Logl: 67705AIC: -128.0BIC: -126.5# param: 310

β carbon: 0.016 (0.010)Logl:67843AIC:-128.2BIC:-126.5# param:356

β carbon: 0.011 (0.005)**Logl:67257AIC:-127.6BIC:-127.2# param:80

β carbon: 0.018 (0.009)*Logl:67878AIC:-128.25BIC:-126.57# param:356

β carbon: 0.019 singular covLogl:67328AIC:-127.2BIC:-125.5# param:355

β carbon : 0.022 (0.010)

β carbon: 0.022 (0.003)***Logl:66366AIC:-125.9BIC:-125.5# param:80

β carbon: 0.024 (0.005)***Logl:66082AIC: BIC: # param:11

β carbon: 0.023 (0.008)*** 1

R²= 0.31

β carbon: 0.031 (0.012)***

β carbon: 0.036 (0.014)**²R²= 0.79

RefineriesN=12(oil, gas, elec)

β carbon: 0.020 (0.009)**Logl: 36833AIC:-69.6BIC:-68.8# param: 163

β carbon: 0.018 (0.009)**Logl:36866AIC:-69.7BIC: -68.9# param: 164

β carbon: 0.017 (0.008)**Logl: 36724AIC: -69.6BIC: -69.1# param: 87

β carbon: 0.018 (0.008)Logl:36796AIC:-69.7BIC:-69.2# param:109

β carbon: 0.017 (0.006)**Logl:36640AIC:-69.5BIC:-69.3# param:43

β carbon: 0.017 (0.008)**Logl:36822AIC:-69.73BIC:-69.22# param:109

β carbon: 0.019 Singular covariance Logl:36593AIC:-69.2BIC:-68.8# param: 109

β carbon : 0.035 (0.010)

β carbon: 0.029 (0.003)***Logl:35587AIC:-67.5BIC:-67.3# param: 43

β carbon: 0.031 (0.005)***Logl:35374AIC: BIC: # param:11

β carbon: 0.037 (0.007)*** 1

R²= 0.41

β carbon: 0.032 (0.012)***

β carbon: 0.049 (0.013)***²R²= 0.80

PaperN=13(oil, gas, coal, elec)

1 iteration

β carbon: -0.013singular covarLogl: 30753AIC: -58.0BIC: -57.1# param: 191

β carbon: 0.000 (0.010)Logl: 35457AIC: -67.1BIC: -66.7# param: 101

β carbon: -0.003 (0.011)Logl:35555AIC:-67.3BIC:-66.7# param:125

β carbon: -0.003 (0.007)Logl:35364AIC:-67.1BIC:-66.9# param:47

β carbon: -0.003 (0.010)Logl:35622AIC: -67.42BIC:-66.83# param:125

β carbon: 0.010 (0.006)*Logl: 34726AIC : -65.7BIC: -65.1# param:125

β carbon : 0.013 (0.011)

β carbon: 0.003 (0.005)Logl: 34578AIC: -65.6BIC: -65.4# param:47

β carbon: 0.007 (0.006)Logl:34332AIC: BIC: # param: 11

β carbon: 0.002 (0.009) 1

R²= 0.22

β carbon: 0.022 (0.015)

β carbon: 0.021 (0.016)²R²= 0.62

Multivariate GARCH models1. DiagonalVech

Cov matrix With C,B,C indefinite, diagonal or scalar

2. BEKKCov matrix

With A and B diagonal

3. Constant Conditional Correlation

Test more parsimonious models2. No GARCH but FGLS: Seemingly Unrelated Regression (corss-sectional)3. Covariances=0 (GARCH and FGLS)4. Common βcarbon for all firms of the same sector5. Aggregated data

Covariance in model Covariance=0

SectorN=Number of firms(Energy regressors in main equation)

DiagVechM Variance target, A,B indefinite

DiagVechM scalar, A,B, indefinite

DiagVech M indefinite, A,B scalar

BEKKM indefinite, A,B diagonal

BEKKM,A,B diagonal

Constant Conditional CorrelationM scalar

FGLS panel Cross-section SUR

DiagVechM,A,B diagonal Univariate Garch per firm

ElectricityN=17(oil, gas, coal, elec)

Mean β carbon : 0.012Q1 β carbon : -0.026 Q3 β carbon : 0.056Wald all β carbon=0:χ²(17)=74.0 P0.0000Wald all β carbon equal:χ²(16)=71.6 P0.0000Logl: 51547AIC :-97.28BIC: -95.72# param:330

Mean β carbon : 0.022Q1 β carbon :-0.007Q3 β carbon : 0.060Wald all β carbon=0:χ²(17)=86.1 P0.0000Wald all β carbon equal:χ²(16)=86.5 P0.0000Logl: 51916AIC :-97.97BIC: -96.41# param:331

Mean β carbon :0.024Q1 β carbon : -0.007Q3 β carbon : 0.059Wald all β carbon=0:χ²(17)=61.1 P0.0000Wald all β carbon equal:χ²(16)=60.9 P0.0000Logl:51739AIC :-97.93BIC: -97.08# param:179

Mean β carbon :0.024Q1 β carbon : -0.007Q3 β carbon : 0.061Wald all β carbon=0:χ²(17)=59.4 P0.0000Wald all β carbon equal:χ²(16)=59.2 P0.0000Logl:51812AIC :-98.01BIC: -97.02# param:211

Mean β carbon :0.017Q1 β carbon : -0.018Q3 β carbon : 0.049Wald all β carbon=0:χ²(17)=83.6 P0.0000Wald all β carbon equal:χ²(16)=83.5 P0.0000Logl:51574AIC :-97.81BIC: -97.46# param: 75

Mean β carbon : 0.030Q1 β carbon -0.002Q3 β carbon : 0.071Wald all β carbon=0:χ²(17)=69.8 P0.0000Wald all β carbon equal:χ²(16)=69.83 P0.0000Logl:51980AIC :-98.33BIC: -97.33# param:211

Mean β carbon : 0.027Q1 β carbon : -0.034Q3 β carbon : 0.077# param : 23

Mean β carbon :0.016Q1 β carbon : -0.015Q3 β carbon : 0.057Wald all β carbon=0:χ²(17)=147.8 P0.0000Wald all β carbon equal:χ²(16)=130.5 P0.0000Logl:51117AIC :-96.95BIC: -96.59# param:75

Mean β carbon :0.016Q1 β carbon : -0.004Q3 β carbon : 0.035# param : 11

Iron&SteelN=13(oil, coal, elec)

Mean β carbon : 0.057Q1 β carbon : 0.042Q3 β carbon : 0.100Wald all β carbon=0:χ²(13)=50.4 P0.0000Wald all β carbon equal:χ²(12)=49.5 P0.0000Logl:36133AIC :-68.25BIC: -67.30# param: 202

Mean β carbon :0.058Q1 β carbon :0.045Q3 β carbon : 0.091Wald all β carbon=0:χ²(13)=55.1 P0.0000Wald all β carbon equal:χ²(12)=51.9 P0.0000Logl:36181AIC :-68.33BIC: -67.38# param:203

Mean β carbon :0.049Q1 β carbon : 0.024Q3 β carbon : 0.090Wald all β carbon=0:χ²(13)=40.0 P0.0001Wald all β carbon equal:χ²(12)=38.4 P0.0001Logl:36056AIC :-68.27BIC: -67.74# param:113

Mean β carbon :0.050Q1 β carbon :0.010Q3 β carbon : 0.079Wald all β carbon=0:χ²()= P0.0000Wald all β carbon equal:χ²()= P0.0000Logl:36162AIC : -68.42BIC: -67.78# param:137

Mean β carbon :0.051Q1 β carbon : 0.022Q3 β carbon : 0.085Wald all β carbon=0:χ²(13)=50.3 P0.0000Wald all β carbon equal:χ²(12)=49.3 P0.0000Logl:35960AIC :-68.21BIC: -68.00# param:59

Mean β carbon : 0.045Q1 β carbon : 0.033Q3 β carbon : 0.070Wald all β carbon=0 χ²(13)=38.67 P0.0002Wald all β carbon equal:χ²(12)=38.06 P0.0002Logl:36256AIC :-68.60BIC:-67.96# param:137

Mean β carbon : 0.077Q1 β carbon : 0.055Q3 β carbon : 0.135# param : 19

Mean β carbon :0.028Q1 β carbon : 0.023Q3 β carbon : 0.054Wald all β carbon=0:χ²(13)=156.8 P0.0000Wald all β carbon equal:χ²(12)=80.87 P0.0000Logl:33711AIC :-63.92BIC: -63.65# param:59

Mean β carbon :0.024Q1 β carbon : 0.006Q3 β carbon : 0.054# param : 10

NonferrousN=5(oil, coal, elec)

Mean β carbon :0.040Q1 β carbon : 0.009Q3 β carbon : 0.084Wald all β carbon=0:χ²(5)=14.5 P0.0129Wald all β carbon equal:χ²(4)=11.1 P0.0250Logl:11738AIC :-23.44BIC: -23.24# param: 42

Mean β carbon : 0.039Q1 β carbon 0.009Q3 β carbon : 0.088Wald all β carbon=0:χ²(5)=13.9 P0.0165Wald all β carbon equal:χ²(4)=10.3 P0.0356Logl:11730AIC :-23.42BIC: -23.22# param:43

Mean β carbon :0.031Q1 β carbon : -0.003Q3 β carbon : 0.0820Wald all β carbon=0:χ²(5)=15.9 P0.0070Wald all β carbon equal:χ²(4)=13.3 P0.0100Logl:11687AIC :-23.4BIC: -23.23# param:29

Mean β carbon :0.032Q1 β carbon :-0.000Q3 β carbon : 0.084Wald all β carbon=0:χ²(5)=16.1 P0.0065Wald all β carbon equal:χ²(4)=12.9 P0.0119Logl:11706AIC :-23.39BIC: -23.21# param:37

Mean β carbon :0.032Q1 β carbon : -0.001Q3 β carbon : 0.083Wald all β carbon=0:χ²(5)=18.3 P0.0026Wald all β carbon equal:χ²(4)=13.3 P0.0098Logl:11689AIC :-23.37BIC: -23.24# param:27

Mean β carbon :0.040 Q1 β carbon : 0.006Q3 β carbon : 0.095Wald all β carbon=0 χ²(5)=18.41 P0.002Wald all β carbon equal:χ²(4)=13.04 P0.011Logl:11735AIC : -23.45BIC:-23.27# param:

Mean β carbon : 0.045Q1 β carbon : 0.008Q3 β carbon : 0.113# param : 11

Mean β carbon :0.036Q1 β carbon : 0.000Q3 β carbon : 0.086Wald all β carbon=0:χ²(5)=22.1 P0.0005Wald all β carbon equal:χ²(4)=9.79 P0.0441Logl:11635AIC :-23.27BIC: -23.14# param:27

Mean β carbon : 0.037Q1 β carbon : 0.015Q3 β carbon :0.066# param : 10

Building materialsN=13(oil, coal, elec)

Mean β carbon : 0.031Q1 β carbon : 0.019Q3 β carbon : 0.068

Mean β carbon : 0.039Q1 β carbon : 0.024Q3 β carbon : 0.075

Mean β carbon :0.028Q1 β carbon : 0.021Q3 β carbon : 0.059

Mean β carbon :0.030Q1 β carbon : 0.031Q3 β carbon : 0.061

Mean β carbon :0.035Q1 β carbon : 0.035Q3 β carbon : 0.069

Mean β carbon : 0.036Q1 β carbon : 0.015Q3 β carbon : 0.080

Mean β carbon : 0.024Q1 β carbon : -0.021Q3 β carbon : 0.081

Mean β carbon :0.017Q1 β carbon : -0.004Q3 β carbon : 0.061

Mean β carbon :0.018Q1 β carbon : -0.001Q3 β carbon :0.026

ChemicalsN=24(oil, gas, coal, elec)

Mean β carbon : 0.036Q1 β carbon :0.010Q3 β carbon : 0.076

Mean β carbon : 0.047Q1 β carbon : 0.019Q3 β carbon : 0.076

Mean β carbon :0.040Q1 β carbon : 0.014Q3 β carbon : 0.083

Mean β carbon :0.043Q1 β carbon : 0.017Q3 β carbon : 0.085

Mean β carbon :0.047Q1 β carbon : 0.018Q3 β carbon : 0.091

Mean β carbon : 0.043 Q1 β carbon : 0.019Q3 β carbon : 0.077

Mean β carbon : 0.055Q1 β carbon : 0.020Q3 β carbon : 0.113

Mean β carbon :0.026Q1 β carbon : -0.004Q3 β carbon : 0.056

Mean β carbon :0.021 Q1 β carbon : 0.013Q3 β carbon :0.039

RefineriesN=12(oil, gas, elec)

Mean β carbon : 0.025Q1 β carbon : 0.018

Mean β carbon : 0.029Q1 β carbon : 0.014Q3 β carbon : 0.038

Mean β carbon :0.027Q1 β carbon : 0.012Q3 β carbon : 0.039

Mean β carbon :0.028Q1 β carbon :0.014Q3 β carbon : 0.035

Mean β carbon :0.025Q1 β carbon : 0.010Q3 β carbon : 0.033

Mean β carbon : 0.027Q1 β carbon : 0.011Q3 β carbon : 0.038

Mean β carbon : 0.046Q1 β carbon : 0.027Q3 β carbon : 0.076

Mean β carbon :0.030Q1 β carbon : 0.020Q3 β carbon : 0.039

Mean β carbon :0.039Q1 β carbon : 0.023Q3 β carbon :0.044

PaperN=13(oil, gas, coal, elec)

Mean β carbon : 0.031Q1 β carbon : 0.011Q3 β carbon : 0.068

Mean β carbon :0.031Q1 β carbon : 0.011Q3 β carbon : 0.068

Mean β carbon : 0.028Q1 β carbon : 0.014Q3 β carbon : 0.060

Mean β carbon :0.026Q1 β carbon : 0.010Q3 β carbon : 0.061

Mean β carbon :0.025Q1 β carbon : 0.016Q3 β carbon : 0.055

Mean β carbon : 0.026Q1 β carbon : 0.001Q3 β carbon : 0.063

Mean β carbon : 0.041Q1 β carbon : 0.007Q3 β carbon : 0.089

Mean β carbon :0.013Q1 β carbon : -0.018Q3 β carbon : 0.045

Mean β carbon :0.010Q1 β carbon : 0.000Q3 β carbon :0.024

All sectorsN=97

Mean β carbon : 0.033Q1 β carbon : 0.004Q3 β carbon : 0.068

Mean β carbon : 0.038Q1 β carbon : 0.012Q3 β carbon :0.074

Mean β carbon : 0.033Q1 β carbon : 0.007Q3 β carbon :0.071

Mean β carbon : 0.034Q1 β carbon : 0.008Q3 β carbon :0.070

Mean β carbon : 0.034Q1 β carbon : 0.001Q3 β carbon :0.069

Mean β carbon : 0.036Q1 β carbon : 0.071Q3 β carbon :0.009

Mean β carbon : 0.045Q1 β carbon : 0.005Q3 β carbon :0.102

Mean β carbon : 0.023Q1 β carbon : -0.004Q3 β carbon :0.057

Mean β carbon : 0.022Q1 β carbon : 0.003Q3 β carbon :0.043

The effect of carbon prices on stock prices for models with firm-specific βcarbon.