Sentiment Effects in the European Emissions Market

45 Pages Posted: 20 Sep 2016

See all articles by Mark Cummins

Mark Cummins

Dublin City University Business School

Peter Deeney

Dublin City University Business School

Michael M. Dowling

ESC Rennes School of Business

Alan Smeaton

Dublin City University - School of Computing

Date Written: September 18, 2016

Abstract

The pricing of European emissions allowances (EUAs) is complicated by the market being driven by not just financial and economic factors, but also the harder-to-gauge uncertain influences of politics and policy. Drawing on a well-established literature showing sentiment to play an expanded role in investment decision-making in the face of uncertainty, we develop a social media sentiment measure through aggregating pertinent Twitter posts about European emissions. Our sentiment measure is significantly predictive of EUA price and price volatility movements. This relationship is shown using hourly intra-day sentiment and price measures for the final year of the December 2013 EUA futures contract. For prices and returns we demonstrate that there is bi-directional Granger causality between changes in sentiment and changes in EUA prices, and we establish that periods of strong (weak) sentiment correspond with periods of high (low) EUA return volatility. These findings demonstrate that sentiment matters in EUA pricing, that it can be measured using social media, and more broadly suggest that sentiment should matter in other young asset markets with scope for uncertain political interference and policy developments.

Keywords: Sentiment, EUA, Carbon Markets, Uncertainty, Social Media

JEL Classification: C32, G14, Q28

Suggested Citation

Cummins, Mark and Deeney, Peter and Dowling, Michael M. and Smeaton, Alan, Sentiment Effects in the European Emissions Market (September 18, 2016). Available at SSRN: https://ssrn.com/abstract=2840375 or http://dx.doi.org/10.2139/ssrn.2840375

Mark Cummins

Dublin City University Business School ( email )

Dublin 9
Ireland

Peter Deeney (Contact Author)

Dublin City University Business School ( email )

Dublin 9
Ireland

Michael M. Dowling

ESC Rennes School of Business ( email )

Rue Robert d'arbrissel, 2
Rennes, 35000
France

Alan Smeaton

Dublin City University - School of Computing ( email )

Glasnevin, Dublin 9 Co
Dublin
Ireland

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