Dissecting Climate Risks: Are they Reflected in Stock Prices?

By Renato Faccini, Rastin Matin, George Skiadopoulos. Social Science Research Network, 2021

318 citations recorded by the source corpus.

We construct novel proxies of aggregate physical and transition climate risks by conducting textual analysis of Reuters climate-change news over 2000-2018. This analysis uncovers four textual risk factors related to the topics of U.S. climate policy, international summits, natural disasters, and global warming, respectively. The first two factors proxy transition risks, whereas the last two proxy physical risks. We find that only the climate policy factor is priced in the U.S. stock market, with the evidence being more pronounced over 2012-2018. The documented positive premium is consistent with the argument that investors hedge short-term transition risks. We validate this explanation using a narrative approach to mark the content of climate news. Our results imply that investors' attention is an important driver of asset returns.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/7d153dd12a39a15bc63a52f06dc0b1ae671fbe53

Citations in the corpus

• Dissecting Green Returns (2021, unknown): “Recent work examines that pricing in equities (e.g., Bolton and Kacperczyk, 2020, 2021, Hsu, Li, and Tsou, 2020, and Faccini, Matin, and Skiadopoulos, 2021), corporate bonds (Huynh and Xia, 2021, and Seltzer, Starks, and Zhu, 2021), municipal bonds (Painter, 2020, and Goldsmith-Pinkham et al.,…”