Tracking market data points for price forecast: .41 correlation between Sentiment Index and AO500 Price Index
AlliedOffsets is happy to launch the first version of its proprietary Sentiment Index for the VCM.
At a time of declining prices, retirements, and a flooding stream of bad press on the VCM (e.g, The Guardian articles’ series on offsetting’s flaws) our aim is to be able to track how sentiment is actually evolving over time.
The goal is to provide a public metric which can inform investment decisions but also keep track of sentiment trends without getting influenced by single events or drawbacks.
Traditionally, market sentiment is a useful measure for stock investors, as it indicates when prices are expected to go up or down. When market sentiment is rising — or bullish — prices are also expected to rise while the opposite is true for declining — or bearish — sentiment. AlliedOffsets’ VCM Sentiment Index brings traditional sentiment analysis into the VCM space, accounting for its specificities and building on AlliedOffsets extensive knowledge and data points.
The Sentiment Index builds off a variety of measures, which we believe contribute to moving market sentiment in the VCM. As examples, the Index tracks, among others, the number of buyers entering and leaving the market, the number of companies pledging to Science Based Target initiative (SBTi), carbon trading activity, and trailing retirements over time.
Our Sentiment Index has been bearish since the beginning of 2023, with a total decrease of more than 31% between January and September. The decline strongly correlates with the drop in prices and retirements the VCM is witnessing since the beginning of the year.
We correlated our Sentiment Index with a broad variety of pricing trends in the VCM between between 2018 and today, and found significant R and R2 values, indicating a relationship between the two variables. AO500, our leading pricing index is found to have an R2 of .41 with the Sentiment Index, when correlated with a 2 weeks delay. The assumption is that market sentiment does not have an immediate impact on prices, requiring some time to show visible change in prices.
The Sentiment Index was also correlated with individual projects’ prices, resulting in a range of coefficients, with most liquid Verra projects showing R2 above .5.
The Sentiment Index will be integrated with further metrics in the coming weeks, so stay tuned for any updates!