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Real-time transition risk

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  • Apel, Matthias
  • Betzer, André
  • Scherer, Bernd

Abstract

We develop a point-in-time index to approximate changes in transition risk from climate-related news events. By explicitly considering news to signal an increase or a decrease in the external pressure towards a shift to a lower-carbon economy, we overcome the assumption that “no news is good news on climate” inherent in previous research. We evaluate the return sensitivity of publicly available climate portfolios that apply different approaches to measure a firm's environmental performance based on investors’ objectives. Our results show that short-term transition risk tends to affect returns of stock portfolios based on firms’ business activity but not emissions.

Suggested Citation

  • Apel, Matthias & Betzer, André & Scherer, Bernd, 2023. "Real-time transition risk," Finance Research Letters, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322007760
    DOI: 10.1016/j.frl.2022.103600
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    References listed on IDEAS

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    1. Robert F Engle & Stefano Giglio & Bryan Kelly & Heebum Lee & Johannes Stroebel, 2020. "Hedging Climate Change News," Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1184-1216.
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    4. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    5. David Ardia & Keven Bluteau & Kris Boudt & Koen Inghelbrecht, 2020. "Climate change concerns and the performance of green versus brown stocks," Working Paper Research 395, National Bank of Belgium.
    6. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    7. Philipp Krueger & Zacharias Sautner & Laura T Starks, 2020. "The Importance of Climate Risks for Institutional Investors," Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1067-1111.
    8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
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    Cited by:

    1. Faccini, Renato & Matin, Rastin & Skiadopoulos, George, 2023. "Dissecting climate risks: Are they reflected in stock prices?," Journal of Banking & Finance, Elsevier, vol. 155(C).

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    More about this item

    Keywords

    Transition risk; Climate finance; News sentiment; Natural language processing; Asset Pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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