The Effects of Oil Price Shocks on the Prices of EU Emission Trading System and European Stock Returns

24 Pages Posted: 29 Jul 2019

See all articles by Styliani Iris Krokida

Styliani Iris Krokida

Athens University of Economics and Business - Department of Accounting and Finance

Neophytos Lambertides

Cyprus University of Technology

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping

Dimitris A. Tsouknidis

Athens University of Economics and Business

Date Written: July 25, 2019

Abstract

This paper examines whether oil price shocks of different origin affect the price of carbon emission allowance traded under the European Union's Emissions Trading System (EU-ETS); leading to changes in aggregate and sector specific European equity returns. The results show that an unexpected oil supply disruption has an imminent but weak positive effect on carbon emission price, while a positive aggregate demand shock has a strong positive effect on carbon emission price. By contrast, a positive oil-specific (precautionary) demand shock has a negative but weak effect on carbon emission price. These findings are economically important as positive shocks on the CO2 emission allowance price trigger a decrease on the aggregate stock return of the European equity market, albeit they trigger a large and persistent increase on European equity returns of oil-related industries with the exception of the Energy sector.

Keywords: oil price shocks; emissions trading system; structural VAR; European stock returns

JEL Classification: G10, G11, G12, G14

Suggested Citation

Krokida, Styliani-Iris and Lambertides, Neophytos and Savva, Christos S. and Tsouknidis, Dimitris A., The Effects of Oil Price Shocks on the Prices of EU Emission Trading System and European Stock Returns (July 25, 2019). Available at SSRN: https://ssrn.com/abstract=3426791 or http://dx.doi.org/10.2139/ssrn.3426791

Styliani-Iris Krokida

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Neophytos Lambertides

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping ( email )

Limassol, 3603
Cyprus
00357252349 (Phone)
00357252674 (Fax)

HOME PAGE: http://www.csavva.com

Dimitris A. Tsouknidis (Contact Author)

Athens University of Economics and Business ( email )

76 Patission Street
GR-104 34 Athens
Greece

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