Yulia V. Veld-Merkoulova

Do Happy People Make Optimistic Investors

Do happy people predict future risk and return differently from unhappy people, or do individuals rely only on economic facts? We survey investors on their subjective sentiment-creating factors, return and risk expectations, and investment plans. We find that noneconomic factors systematically affect return and risk expectations, where the return effect is more profound. Investment plans are also affected by noneconomic factors. Sports results and general feelings significantly affect predictions. Sufferers from seasonal affective disorder have lower return expectations in the autumn than in other seasons, supporting the winter blues hypothesis.

Why Do Individuals Not Participate in the Stock Market

We use a representative survey to study economic and non-economic factors that affect stock market participation. We find that the Perceived Equity Risk Premium (PERP), defined as the difference between the individual’s expected stock market return and her personal opportunity cost of capital, is positively related to stock market participation. A high percentage of non-investors (66%) assert that they will never invest in stocks. This attitude is more likely for individuals who have a lower PERP, are less financially literate, and suffer more from inertia.

Credit Cards: Transactional Convenience or Debt-Trap?: Credit Cards

We survey individuals on their credit card usage. Contrary to popular press, most credit card holders use credit cards in a responsible manner. They tend to use credit cards for transaction convenience and pay little interest. Only a minor subset of people uses credit cards to access expensive credit, with only 7% of credit card holders in our sample never paying the balance in full. Credit card debt is more common among older, less financially literate, and less trusting respondents. Even individuals with credit card debt are well aware about its costs and are likely to make informed financial choices.

Do Individuals Use Credit Cards Rationally

We survey individuals on their credit card usage. Contrary to popular press, most credit card holders use credit cards in a responsible manner. They tend to use credit cards for transaction convenience and pay little interest costs. Only a minor subset of people uses credit cards to access expensive credit, with only 7% of credit card holders in our sample never paying the balance in full. Credit card debt is more common among older, less financially literate, and less trusting respondents. Even individuals with credit card debt are well aware about its costs and are likely to make informed financial choices.

Conclusions, Limitations and Future Research

This chapter reviews the main results of the book and provides a discussion of the research limitations and potential avenues for further study of carbon markets. One of the main results of this book is that carbon markets efficiently incorporate most regulatory signals in the prices of carbon allowances, while implied volatility reflects the expected uncertainity before such announcements and its resolution after the institutional events. However, after the start of the financial crisis, carbon market efficiency has deteriorated. Moreover, on the individual firm level, carbon emissions do not significantly affect stock market valuations. This result shows that in the presence of carbon allowances oversupply, carbon market alone is not effective in influencing corporate policies to reduce greenhouse emissions.

How Does Carbon Market Work

The goal of reducing carbon emissions can be achieved using either command approach or market mechanisms. Generally, market mechanisms are the preferred approach as they allow countries reach the same target emissions reduction level with the least economic cost. In market-driven schemes, the overall burden of cutting total emissions gets redistributed in such a way that largest share of emissions reduction ends up with the firms that have lowest marginal costs of reducing emissions. Most countries that signed the Kyoto protocol adopted their own version of carbon trading schemes. By far the largest carbon trading scheme in the world was, and remains, the European Union Emissions Trading Scheme. In this scheme, individual nations receive capped emissions allocations that they are free to divided between the large domestic polluters. These emissions allowances can then be freely traded, creating a carbon market. Firms that succeed in reducing their emissions can sell their excess permits, while companies with prohibitively large costs of emissions reduction can buy additional permits. Together with the gradually declining total amount of allocated permits, such market is expected to reduce the carbon emissions in the most cost-effective way. Previous studies that examined the efficiency of European carbon market, have come to contradictory conclusions, where only some of them found evidence that carbon prices react to the regulatory announcements in an efficient way. Importantly, previous research focussed on the earlier stages of the EU Emissions Trading Scheme, when the carbon market was not fully developed.

Does CO 2 Emissions Performance Matter for Stock Prices

Since the primary concern of decision makers in publicly traded companies is the shareholder wealth, the effectiveness of a carbon trading scheme on the level of individual companies should manifest itself through the stock price reaction of affected companies to the relevant information. This information can be either market-wide (for example, regulatory announcements) or company-specific, such as firm-level carbon allowance allocations or emissions data. This chapter uses detailed firm-level data to analyse the effects of carbon trading on stock prices of affected companies and on the future changes in carbon emission levels. The results suggest that the EU carbon trading scheme has not been very effective in reaching its goals of motivating companies to reduce their emissions. Most of the verification events in 2006–2011 did not significantly affect stock returns. Share prices of carbon-intensive companies are more sensitive to the emissions-related news, but even for these firms the effect is not always present. Consistent with the weak relation between carbon performance and equity prices, companies do not change their emissions levels following the previous negative market reaction to emissions data release. Possible explanation for the ineffectiveness of the EU ETS is its inability to set sufficiently tight emissions caps. This was evident in the overallocation of allowances during the first phase of the scheme, and in their high supply and low prices following the fall in economic activity during the financial crisis.

Do Regulations Affect Carbon Market Returns and Volatility

If the carbon market is expected to be an effective instrument of emissions reduction, the observed market prices should reflect the important information regarding new regulations, availability of emissions permits and aggregate marginal costs of emissions reduction. This chapter tests the informational efficiency of European carbon market by conducting an event study of the effects of regulatory and other announcements on the carbon price and volatility. The analysis considers both supply-side and demand-side events that can be expected to affect prices and volatility of the emissions allowances. Generally, carbon market reacts to announcements in predictable way, with expected increases (decreases) in the supply of allowances resulting in a negative (positive) price reaction and expected increases (decreases) in the demand for allowances resulting in a positive (negative) price reaction. At the same time, not all announcements lead to a significant price impact. These results are robust to controlling for relevant factors, including oil and gas prices, stock market returns and weather conditions. With regard to the market volatility, the results show that it is largely unaffected by the various regulatory announcements. However, the dynamics of the option implied volatility indicates that the market uncertainty increases before scheduled events and decreases afterwards. There also exist a number of market reaction anomalies that suggest that, while largely well functioning, the EU carbon market is not perfectly informationally efficient.

The Information Content of Carbon Options

This study analyses the forecasting accuracy of the implied volatility of options on futures contracts for the delivery of CO2 emissions allowances (carbon options) traded on the European Climate Exchange. We demonstrate that option implied volatility is highly informative about the variance of returns realized over the remaining life of the options. It is also directionally accurate in predicting future volatility changes. However, we also find that implied volatility of carbon options is biased and informationally inefficient, especially for periods of time which do not coincide with the remaining life of the option. This suggests that the market has yet to fully mature.