1. Université de Mons Capital market response to emission allowance prices: a multi-variate GARCH approach. Venmans Frank | frank.venmans@umons.ac.be | 065/37 32 13frank.venmans@umons.ac.be Assistant Service Finance, Faculté Waroqué d’Economie et de Gestion 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 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 effect of carbon prices on stock prices with common β carbon 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 modelCovariance=0 DiagVech (1,1) M Variance targ A,B indefinite DiagVech (1,1) M scalar A,B indefinite DiagVech (1,1) M indefinite A,B scalar BEKK(1,1) M indefinite A,B diagonal BEKK (1,1) M diagonal A,B diagonal CCC M scalar DiagVech (1,1) M indefinite A,B diagonal FGLS Panel Cross-section SUR DiagVech (1,1) M diagonal A,B diagonal DiagVech (1,1) M diagonal const A,B diagonal const FGLS Panel period heteroscedast Aggregate Garch Aggregate OLS Electricity N=17 (oil, gas, coal, elec) β carbon: -0.002 (0.008) Logl:51580 AIC:-97.37 BIC:-95.89 # param:314 β carbon: -0.003 (0.009) Logl:51348 AIC:-96.93 BIC:-95.44 # param:315 β carbon: -0.000 (0.008) Logl:51707 AIC:-97.90 BIC:-97.13 # param:163 β carbon : -0.001 (0.007) Logl:51784 AIC :-97.98 BIC:-97.07 # param:195 β carbon : -0.003 (0.005) Logl:51526 AIC :-97.75 BIC:-97.47 # param:59 β carbon : 0.001 (0.007) Logl:51945 AIC :-98.29 BIC:-97.37 # param:195 β carbon : 0.003 (0.006) Logl:51783 AIC :-97.98 BIC:-97.07 # param:195 β carbon: 0.001 (0.009) # param:7 β carbon: 0.005 (0.003) Logl:51073 AIC:-96.89 BIC:-96.61 # param: 59 β carbon: 0.011(0.004)** Logl: 50884 AIC: 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)² R²=0.89 # param:7 Iron&Steel N=13 (oil, coal, elec) β carbon: 0.0034 (0.012) Logl: 36223 AIC:-68.4 BIC:-67.5 # param:189 β carbon: 0.0017 singular covar Logl:33865 AIC:-63.9 BIC:-63.06 # param:190 β carbon: 0.0038 (0.013) Logl: 36051 AIC: -68.3 BIC: -67.8 # param: 100 β carbon: 0.005 (0.012) Logl:36144 AIC:-68.4 BIC:-67.8 # param:124 β carbon: -0.0005 (0.008) Logl:35890 AIC:-68.1 BIC:-67.8 # param:46 β carbon: 0.0002 (0.012) Logl:36240 AIC:-68.59 BIC:-68.00 # param:124 β carbon: 0.0084 (0.013) Logl:36141 AIC:-68.40 BIC:-67.82 # param:124 β carbon : 0.018 (0.015) β carbon: 0.020 (0.0044)*** Logl:33683 AIC:-63.9 BIC:-63.7 # param:46 β carbon: 0.024 (0.007)*** Logl:33336 AIC: 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)*² R²=0.75 Nonferrous N=5 (oil, coal, elec) β carbon: 0.036 (0.020)* Logl:11733 AIC:-23.44 BIC:-23.25 # param:37 β carbon: 0.035 (0.018)* Logl:11725 AIC:-23.42 BIC:-23.23 # param:38 β carbon: 0.028 (0.018) Logl: 11682 AIC: -23.36 BIC: -23.24 # param: 24 β carbon: 0.031 (0.018)* Logl:11701 AIC:-23.38 BIC:-23.22 # param:32 β carbon: 0.029 Logl:11684 AIC:-23.37 BIC:-23.26 # param:22 β carbon: 0.037 (0.017)** Logl:11729 AIC:-23.44 BIC:-23.28 # param:32 β carbon: 0.046 (0.018)*** Logl:11719 AIC:-23.42 BIC:-23.27 # param:32 β carbon : 0.040 (0.023) β carbon: 0.038 (0.012)*** Logl:11630 AIC:-23.26 BIC:-23.15 # param: 22 β carbon: 0.035 (0.015)** Logl: 9879 AIC: 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)*² R²= 0.66 Building materials N=13 (oil, coal, elec) β carbon: -0.0028 singular covar Logl:36339 AIC:-68.6 BIC:-67.7 # param: 189 β carbon: 0.008 singular covariance Logl:35902 AIC:-67.8 BIC:-66.9 # param: 190 β carbon: 0.0033 (0.010) Logl: 36167 AIC: -68.5 BIC: -68.0 # param: 100 β carbon: 0.0013 (0.009) Logl:36250 AIC:-68.6 BIC:-68.0 # param: 124 β carbon: 0.0049 (0.007) Logl:36069 AIC:-68.4 BIC:-68.2 # param: 46 β carbon: 0.0027 (0.009) Logl:36325 AIC:-68.76 BIC:-68.17 # param: 124 β carbon: 0.0078 (0.008) Logl:36223 AIC:-68.5 BIC:-67.9 # param: 124 β carbon : 0.010 (0.012) β carbon: 0.020 (0.004)*** Logl:36250 AIC:-68.6 BIC:-68.0 # param: 46 β carbon: 0.017 (0.007)** Logl:35081 AIC: 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)² R²= 0.76 Chemicals N=24 (oil, gas, coal, elec) β carbon: 0.025 singular covariance Logl:66492 AIC:-125.1 BIC:-122.3 # param:608 β carbon: 0.023 (0.021) Logl:63402 AIC:-119.27 BIC:-116.40 # param:609 β carbon: 0.013 (0.009) Logl: 67705 AIC: -128.0 BIC: -126.5 # param: 310 β carbon: 0.016 (0.010) Logl:67843 AIC:-128.2 BIC:-126.5 # param:356 β carbon: 0.011 (0.005)** Logl:67257 AIC:-127.6 BIC:-127.2 # param:80 β carbon: 0.018 (0.009)* Logl:67878 AIC:-128.25 BIC:-126.57 # param:356 β carbon: 0.019 singular cov Logl:67328 AIC:-127.2 BIC:-125.5 # param:355 β carbon : 0.022 (0.010) β carbon: 0.022 (0.003)*** Logl:66366 AIC:-125.9 BIC:-125.5 # param:80 β carbon: 0.024 (0.005)*** Logl:66082 AIC: 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)**² R²= 0.79 Refineries N=12 (oil, gas, elec) β carbon: 0.020 (0.009)** Logl: 36833 AIC:-69.6 BIC:-68.8 # param: 163 β carbon: 0.018 (0.009)** Logl:36866 AIC:-69.7 BIC: -68.9 # param: 164 β carbon: 0.017 (0.008)** Logl: 36724 AIC: -69.6 BIC: -69.1 # param: 87 β carbon: 0.018 (0.008) Logl:36796 AIC:-69.7 BIC:-69.2 # param:109 β carbon: 0.017 (0.006)** Logl:36640 AIC:-69.5 BIC:-69.3 # param:43 β carbon: 0.017 (0.008)** Logl:36822 AIC:-69.73 BIC:-69.22 # param:109 β carbon: 0.019 Singular covariance Logl:36593 AIC:-69.2 BIC:-68.8 # param: 109 β carbon : 0.035 (0.010) β carbon: 0.029 (0.003)*** Logl:35587 AIC:-67.5 BIC:-67.3 # param: 43 β carbon: 0.031 (0.005)*** Logl:35374 AIC: 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)*** ² R²= 0.80 Paper N=13 (oil, gas, coal, elec) 1 iteration β carbon: -0.013 singular covar Logl: 30753 AIC: -58.0 BIC: -57.1 # param: 191 β carbon: 0.000 (0.010) Logl: 35457 AIC: -67.1 BIC: -66.7 # param: 101 β carbon: -0.003 (0.011) Logl:35555 AIC:-67.3 BIC:-66.7 # param:125 β carbon: -0.003 (0.007) Logl:35364 AIC:-67.1 BIC:-66.9 # param:47 β carbon: -0.003 (0.010) Logl:35622 AIC: -67.42 BIC:-66.83 # param:125 β carbon: 0.010 (0.006)* Logl: 34726 AIC : -65.7 BIC: -65.1 # param:125 β carbon : 0.013 (0.011) β carbon: 0.003 (0.005) Logl: 34578 AIC: -65.6 BIC: -65.4 # param:47 β carbon: 0.007 (0.006) Logl:34332 AIC: 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)² R²= 0.62 Covariance in modelCovariance=0 Sector N=Number of firms (Energy regressors in main equation) DiagVech M Variance target, A,B indefinite DiagVech M scalar, A,B, indefinite DiagVech M indefinite, A,B scalar BEKK M indefinite, A,B diagonal BEKK M,A,B diagonal Constant Conditional Correlation M scalar FGLS panel Cross-section SUR DiagVech M,A,B diagonal Univariate Garch per firm Electricity N=17 (oil, gas, coal, elec) Mean β carbon : 0.012 Q1 β carbon : -0.026 Q3 β carbon : 0.056 Wald all β carbon=0: χ²(17)=74.0 P0.0000 Wald all β carbon equal: χ²(16)=71.6 P0.0000 Logl: 51547 AIC :-97.28 BIC: -95.72 # param:330 Mean β carbon : 0.022 Q1 β carbon :-0.007 Q3 β carbon : 0.060 Wald all β carbon=0: χ²(17)=86.1 P0.0000 Wald all β carbon equal: χ²(16)=86.5 P0.0000 Logl: 51916 AIC :-97.97 BIC: -96.41 # param:331 Mean β carbon :0.024 Q1 β carbon : -0.007 Q3 β carbon : 0.059 Wald all β carbon=0: χ²(17)=61.1 P0.0000 Wald all β carbon equal: χ²(16)=60.9 P0.0000 Logl:51739 AIC :-97.93 BIC: -97.08 # param:179 Mean β carbon :0.024 Q1 β carbon : -0.007 Q3 β carbon : 0.061 Wald all β carbon=0: χ²(17)=59.4 P0.0000 Wald all β carbon equal: χ²(16)=59.2 P0.0000 Logl:51812 AIC :-98.01 BIC: -97.02 # param:211 Mean β carbon :0.017 Q1 β carbon : -0.018 Q3 β carbon : 0.049 Wald all β carbon=0: χ²(17)=83.6 P0.0000 Wald all β carbon equal: χ²(16)=83.5 P0.0000 Logl:51574 AIC :-97.81 BIC: -97.46 # param: 75 Mean β carbon : 0.030 Q1 β carbon -0.002 Q3 β carbon : 0.071 Wald all β carbon=0: χ²(17)=69.8 P0.0000 Wald all β carbon equal: χ²(16)=69.83 P0.0000 Logl:51980 AIC :-98.33 BIC: -97.33 # param:211 Mean β carbon : 0.027 Q1 β carbon : -0.034 Q3 β carbon : 0.077 # param : 23 Mean β carbon :0.016 Q1 β carbon : -0.015 Q3 β carbon : 0.057 Wald all β carbon=0: χ²(17)=147.8 P0.0000 Wald all β carbon equal: χ²(16)=130.5 P0.0000 Logl:51117 AIC :-96.95 BIC: -96.59 # param:75 Mean β carbon :0.016 Q1 β carbon : -0.004 Q3 β carbon : 0.035 # param : 11 Iron&Steel N=13 (oil, coal, elec) Mean β carbon : 0.057 Q1 β carbon : 0.042 Q3 β carbon : 0.100 Wald all β carbon=0: χ²(13)=50.4 P0.0000 Wald all β carbon equal: χ²(12)=49.5 P0.0000 Logl:36133 AIC :-68.25 BIC: -67.30 # param: 202 Mean β carbon :0.058 Q1 β carbon :0.045 Q3 β carbon : 0.091 Wald all β carbon=0: χ²(13)=55.1 P0.0000 Wald all β carbon equal: χ²(12)=51.9 P0.0000 Logl:36181 AIC :-68.33 BIC: -67.38 # param:203 Mean β carbon :0.049 Q1 β carbon : 0.024 Q3 β carbon : 0.090 Wald all β carbon=0: χ²(13)=40.0 P0.0001 Wald all β carbon equal: χ²(12)=38.4 P0.0001 Logl:36056 AIC :-68.27 BIC: -67.74 # param:113 Mean β carbon :0.050 Q1 β carbon :0.010 Q3 β carbon : 0.079 Wald all β carbon=0: χ²()= P0.0000 Wald all β carbon equal: χ²()= P0.0000 Logl:36162 AIC : -68.42 BIC: -67.78 # param:137 Mean β carbon :0.051 Q1 β carbon : 0.022 Q3 β carbon : 0.085 Wald all β carbon=0: χ²(13)=50.3 P0.0000 Wald all β carbon equal: χ²(12)=49.3 P0.0000 Logl:35960 AIC :-68.21 BIC: -68.00 # param:59 Mean β carbon : 0.045 Q1 β carbon : 0.033 Q3 β carbon : 0.070 Wald all β carbon=0 χ²(13)=38.67 P0.0002 Wald all β carbon equal: χ²(12)=38.06 P0.0002 Logl:36256 AIC :-68.60 BIC:-67.96 # param:137 Mean β carbon : 0.077 Q1 β carbon : 0.055 Q3 β carbon : 0.135 # param : 19 Mean β carbon :0.028 Q1 β carbon : 0.023 Q3 β carbon : 0.054 Wald all β carbon=0: χ²(13)=156.8 P0.0000 Wald all β carbon equal: χ²(12)=80.87 P0.0000 Logl:33711 AIC :-63.92 BIC: -63.65 # param:59 Mean β carbon :0.024 Q1 β carbon : 0.006 Q3 β carbon : 0.054 # param : 10 Nonferrous N=5 (oil, coal, elec) Mean β carbon :0.040 Q1 β carbon : 0.009 Q3 β carbon : 0.084 Wald all β carbon=0: χ²(5)=14.5 P0.0129 Wald all β carbon equal: χ²(4)=11.1 P0.0250 Logl:11738 AIC :-23.44 BIC: -23.24 # param: 42 Mean β carbon : 0.039 Q1 β carbon 0.009 Q3 β carbon : 0.088 Wald all β carbon=0: χ²(5)=13.9 P0.0165 Wald all β carbon equal: χ²(4)=10.3 P0.0356 Logl:11730 AIC :-23.42 BIC: -23.22 # param:43 Mean β carbon :0.031 Q1 β carbon : -0.003 Q3 β carbon : 0.0820 Wald all β carbon=0: χ²(5)=15.9 P0.0070 Wald all β carbon equal: χ²(4)=13.3 P0.0100 Logl:11687 AIC :-23.4 BIC: -23.23 # param:29 Mean β carbon :0.032 Q1 β carbon :-0.000 Q3 β carbon : 0.084 Wald all β carbon=0: χ²(5)=16.1 P0.0065 Wald all β carbon equal: χ²(4)=12.9 P0.0119 Logl:11706 AIC :-23.39 BIC: -23.21 # param:37 Mean β carbon :0.032 Q1 β carbon : -0.001 Q3 β carbon : 0.083 Wald all β carbon=0: χ²(5)=18.3 P0.0026 Wald all β carbon equal: χ²(4)=13.3 P0.0098 Logl:11689 AIC :-23.37 BIC: -23.24 # param:27 Mean β carbon :0.040 Q1 β carbon : 0.006 Q3 β carbon : 0.095 Wald all β carbon=0 χ²(5)=18.41 P0.002 Wald all β carbon equal: χ²(4)=13.04 P0.011 Logl:11735 AIC : -23.45 BIC:-23.27 # param: Mean β carbon : 0.045 Q1 β carbon : 0.008 Q3 β carbon : 0.113 # param : 11 Mean β carbon :0.036 Q1 β carbon : 0.000 Q3 β carbon : 0.086 Wald all β carbon=0: χ²(5)=22.1 P0.0005 Wald all β carbon equal: χ²(4)=9.79 P0.0441 Logl:11635 AIC :-23.27 BIC: -23.14 # param:27 Mean β carbon : 0.037 Q1 β carbon : 0.015 Q3 β carbon :0.066 # param : 10 Building materials N=13 (oil, coal, elec) Mean β carbon : 0.031 Q1 β carbon : 0.019 Q3 β carbon : 0.068 Mean β carbon : 0.039 Q1 β carbon : 0.024 Q3 β carbon : 0.075 Mean β carbon :0.028 Q1 β carbon : 0.021 Q3 β carbon : 0.059 Mean β carbon :0.030 Q1 β carbon : 0.031 Q3 β carbon : 0.061 Mean β carbon :0.035 Q1 β carbon : 0.035 Q3 β carbon : 0.069 Mean β carbon : 0.036 Q1 β carbon : 0.015 Q3 β carbon : 0.080 Mean β carbon : 0.024 Q1 β carbon : -0.021 Q3 β carbon : 0.081 Mean β carbon :0.017 Q1 β carbon : -0.004 Q3 β carbon : 0.061 Mean β carbon :0.018 Q1 β carbon : -0.001 Q3 β carbon :0.026 Chemicals N=24 (oil, gas, coal, elec) Mean β carbon : 0.036 Q1 β carbon :0.010 Q3 β carbon : 0.076 Mean β carbon : 0.047 Q1 β carbon : 0.019 Q3 β carbon : 0.076 Mean β carbon :0.040 Q1 β carbon : 0.014 Q3 β carbon : 0.083 Mean β carbon :0.043 Q1 β carbon : 0.017 Q3 β carbon : 0.085 Mean β carbon :0.047 Q1 β carbon : 0.018 Q3 β carbon : 0.091 Mean β carbon : 0.043 Q1 β carbon : 0.019 Q3 β carbon : 0.077 Mean β carbon : 0.055 Q1 β carbon : 0.020 Q3 β carbon : 0.113 Mean β carbon :0.026 Q1 β carbon : -0.004 Q3 β carbon : 0.056 Mean β carbon :0.021 Q1 β carbon : 0.013 Q3 β carbon :0.039 Refineries N=12 (oil, gas, elec) Mean β carbon : 0.025 Q1 β carbon : 0.018 Mean β carbon : 0.029 Q1 β carbon : 0.014 Q3 β carbon : 0.038 Mean β carbon :0.027 Q1 β carbon : 0.012 Q3 β carbon : 0.039 Mean β carbon :0.028 Q1 β carbon :0.014 Q3 β carbon : 0.035 Mean β carbon :0.025 Q1 β carbon : 0.010 Q3 β carbon : 0.033 Mean β carbon : 0.027 Q1 β carbon : 0.011 Q3 β carbon : 0.038 Mean β carbon : 0.046 Q1 β carbon : 0.027 Q3 β carbon : 0.076 Mean β carbon :0.030 Q1 β carbon : 0.020 Q3 β carbon : 0.039 Mean β carbon :0.039 Q1 β carbon : 0.023 Q3 β carbon :0.044 Paper N=13 (oil, gas, coal, elec) Mean β carbon : 0.031 Q1 β carbon : 0.011 Q3 β carbon : 0.068 Mean β carbon :0.031 Q1 β carbon : 0.011 Q3 β carbon : 0.068 Mean β carbon : 0.028 Q1 β carbon : 0.014 Q3 β carbon : 0.060 Mean β carbon :0.026 Q1 β carbon : 0.010 Q3 β carbon : 0.061 Mean β carbon :0.025 Q1 β carbon : 0.016 Q3 β carbon : 0.055 Mean β carbon : 0.026 Q1 β carbon : 0.001 Q3 β carbon : 0.063 Mean β carbon : 0.041 Q1 β carbon : 0.007 Q3 β carbon : 0.089 Mean β carbon :0.013 Q1 β carbon : -0.018 Q3 β carbon : 0.045 Mean β carbon :0.010 Q1 β carbon : 0.000 Q3 β carbon :0.024 All sectors N=97 Mean β carbon : 0.033 Q1 β carbon : 0.004 Q3 β carbon : 0.068 Mean β carbon : 0.038 Q1 β carbon : 0.012 Q3 β carbon :0.074 Mean β carbon : 0.033 Q1 β carbon : 0.007 Q3 β carbon :0.071 Mean β carbon : 0.034 Q1 β carbon : 0.008 Q3 β carbon :0.070 Mean β carbon : 0.034 Q1 β carbon : 0.001 Q3 β carbon :0.069 Mean β carbon : 0.036 Q1 β carbon : 0.071 Q3 β carbon :0.009 Mean β carbon : 0.045 Q1 β carbon : 0.005 Q3 β carbon :0.102 Mean β carbon : 0.023 Q1 β carbon : -0.004 Q3 β carbon :0.057 Mean β carbon : 0.022 Q1 β carbon : 0.003 Q3 β carbon :0.043 The effect of carbon prices on stock prices for models with firm-specific β carbon.