Hedging Climate Change News

By Robert F. Engle, Stefano Giglio, Bryan T. Kelly, Heebum Lee, Johannes Stroebel. The Review of financial studies, 2019

1,044 citations recorded by the source corpus.

We propose and implement a procedure to dynamically hedge climate change risk. We extract innovations from climate news series that we construct through textual analysis of newspapers. We then use a mimicking portfolio approach to build climate change hedge portfolios. We discipline the exercise by using third-party ESG scores of firms to model their climate risk exposures. We show that this approach yields parsimonious and industry-balanced portfolios that perform well in hedging innovations in climate news both in sample and out of sample. We discuss multiple directions for future research on financial approaches to managing climate risk.

Subfields: Economics and Econometrics, Finance, Global and Planetary Change

View Paper: https://www.semanticscholar.org/paper/6a8b56f8858e17f26f6eafc76b1f0c76c13b9cc6

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In Global and Planetary Change

Citations in the corpus

Investor Rewards to Climate Responsibility: Stock-Price Responses to the Opposite Shocks of the 2016 and 2020 U.S. Elections (2021, neutral): “…Gustafson, and Lewis (2019), Bolton and Kacperczyk (2020a,b), Ceccarelli, Ramelli, and Wagner (2021), Choi, Gao, and Jiang (2020), Engle et al. (2020), Hong, Li, and Xu (2019), 6Prior work has exploited firm-specific CSR events (Krüger, 2015b), narrow adoptions of shareholder…”
Sustainable investing in equilibrium (2019, neutral): “Engle et al. (2020) develop a procedure to dynamically hedge climate risk by constructing mimicking portfolios that hedge innovations in climate news series obtained by textual analysis of news sources.”
The impact of climate change on the cost of bank loans (2020, positive): “Using a news-based measure of climate risk developed by Engle et al. (2020),”
Carbon Tail Risk (2020, neutral): “Engle et al. (2020) develop a dynamic strategy that hedges news about climate change, and Barnett, Brock, and Hansen (2020) provide a decision theory framework to address how climate uncertainty affects asset prices.”
Climate Risk and Capital Structure (2019, background): “34 also consistent with Engle et al. (2019) who show that CSR acts as a hedge against physical and regulatory risks.”
Corporate Social Responsibility and Market Efficiency: Evidence from ESG and Misvaluation Measures (2020, background): “Investors’ awareness towards climate risk, for example, changes in relevance over time (Engle et al., 2020).”
Firm-level Climate Change Exposure (2020, methodology): “We proxy for attention by using the time-varying measure of climate change news developed in Engle et al. (2020).”
Dissecting Climate Risks: Are they Reflected in Stock Prices? (2021, background): “Our paper contributes to the growing empirical literature on climate finance with respect to the measurement of climate risks and their effects on asset prices, by taking a textual approach (for a detailed survey, see Giglio et al. (2021a)). This literature finds mixed results depending on the varia”