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Carbon dioxide and asset pricing: Evidence from international stock markets

Author

Listed:
  • Chen, Zhuo
  • Liu, Jinyu
  • Lu, Andrea
  • Tao, Libin

Abstract

We use carbon dioxide (CO2) emissions growth to measure consumption risk within a consumption-based capital asset pricing model framework. Given the comprehensive worldwide coverage of CO2 emissions, this measure allows us to use the full history of stock market data in the US, Europe, the world, and fifteen international markets. For the US (Europe/the world), we are able to explain the observed equity market premium with a relative risk aversion of 6 (10/12), which is less than half the size of that estimated using the canonical expenditures-based consumption growth measure. The average estimated relative risk aversion across fifteen other international markets is 5. We also find evidence that the growth of CO2 emissions is a priced risk factor that captures the cross section of stock portfolio returns.

Suggested Citation

  • Chen, Zhuo & Liu, Jinyu & Lu, Andrea & Tao, Libin, 2024. "Carbon dioxide and asset pricing: Evidence from international stock markets," Journal of Empirical Finance, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:empfin:v:75:y:2024:i:c:s0927539823001287
    DOI: 10.1016/j.jempfin.2023.101461
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    More about this item

    Keywords

    International asset pricing; Consumption-based capital asset pricing model; Carbon dioxide emissions;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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