Investor attention and carbon return: evidence from the EU-ETS

Abstract

This paper firstly puts forward to employ investor attention obtained from Google trends to explain and forecast carbon futures return in the European Union-Emission Trading Scheme (EU-ETS). Our empirical results show that investor attention is a granger cause to changes in carbon return. Furthermore, investor attention generates both linear and non-linear effects on carbon return. The results demonstrate that investor attention shows excellent explanatory power on carbon return. Moreover, we conduct several out-of-sample forecasts to explore the predictive power of investor attention. The results indicate that incorporating investor attention indeed improve the accuracy of out-of-sample forecasts both in short and long horizons and can generate significant economic values. All results demonstrate that investor attention is a non-negligible pricing factor in carbon market.