Climate change attention and carbon futures return prediction

Abstract

This study explores the predictive effect of climate change attention on carbon futures returns. Using climate‐related Google Trends and news, we construct five dimensions of the public climate attention index and media climate attention index. After feature selection, we incorporate the optimized combination with lagged order into the machine learning model to predict EU Emission Allowance futures returns. Our empirical results show that the forecasting models with climate attention outperform the corresponding benchmark models, indicating that climate attention does provide predictive information for carbon futures returns. In addition, we carry out trading simulations to investigate the economic performance of the forecast results. It turns out that the market strategies based on the prediction models with climate attention can deliver more benefits than the counterpart market strategies. More specifically, the cumulative returns reach 140% during the out‐of‐sample period, much higher than 79% of the cumulative returns of the buy‐and‐hold strategy.

Re-examining the efficiency of the EU carbon futures market in phase Ⅱ: price discovery and intertemporal arbitrage

“…It is often reflected in the futures market first and then transmitted to the spot market. It should be noted that changes in the prices of fossil fuels such as coal, crude oil and natural gas can directly affect the carbon spot market, but such impact is limited and carbon futures prices remain highly predictive of future carbon spot prices (Yu et al, 2015;Ahonen et al, 2022;Gong et al, 2023). The price discovery function of the EU carbon futures can be considerably ascribed to the characteristics of futures trading itself and the wide range of market participants.…”

The predictability of carbon futures volatility: New evidence from the spillovers of fossil energy futures returns

“…Our research aims to forecast carbon futures volatility using the return spillovers of fossil energy futures. Following the numerous research (see, e.g., Dutta, 2018; Gong et al, 2023; Guo et al, 2022; Jiang & Zhang, 2023; Kim & Park, 2021; Liu et al, 2021; Reboredo, 2014; Zhang, Luo, et al, 2022), we choose the European Union Allowances (EUA) carbon futures, which is the earliest and most active carbon futures throughout the world. We collect the daily price data of EUA carbon futures traded in the International Continental Exchange (ICE) on Investing.…”

“…The growing threats of climate change, whether physical or transition risk, have given rise to not only the global concern of investors and policymakers but also the attention of economists and academics (see, e.g., Bolton & Kacperczyk, 2021;Choi et al, 2020;Gong et al, 2023;Hong et al, 2020;Stroebel & Wurgler, 2021;van Benthem et al, 2022). One of the most crucial issues under deteriorated climate conditions is how to achieve the goals of carbon neutrality and mitigate climate warming.…”