IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2101.10635.html
   My bibliography  Save this paper

The Market Measure of Carbon Risk and its Impact on the Minimum Variance Portfolio

Author

Listed:
  • Th'eo Roncalli
  • Th'eo Le Guenedal
  • Fr'ed'eric Lepetit
  • Thierry Roncalli
  • Takaya Sekine

Abstract

Like ESG investing, climate change is an important concern for asset managers and owners, and a new challenge for portfolio construction. Until now, investors have mainly measured carbon risk using fundamental approaches, such as with carbon intensity metrics. Nevertheless, it has not been proven that asset prices are directly impacted by these fundamental-based measures. In this paper, we focus on another approach, which consists in measuring the sensitivity of stock prices with respect to a carbon risk factor. In our opinion, carbon betas are market-based measures that are complementary to carbon intensities or fundamental-based measures when managing investment portfolios, because carbon betas may be viewed as an extension or forward-looking measure of the current carbon footprint. In particular, we show how this new metric can be used to build minimum variance strategies and how they impact their portfolio construction.

Suggested Citation

  • Th'eo Roncalli & Th'eo Le Guenedal & Fr'ed'eric Lepetit & Thierry Roncalli & Takaya Sekine, 2021. "The Market Measure of Carbon Risk and its Impact on the Minimum Variance Portfolio," Papers 2101.10635, arXiv.org.
    • Handle: RePEc:arx:papers:2101.10635
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2101.10635
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Maxwell, John W & Lyon, Thomas P & Hackett, Steven C, 2000. "Self-Regulation and Social Welfare: The Political Economy of Corporate Environmentalism," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 583-617, October.
    2. Scherer, Bernd, 2011. "A note on the returns from minimum variance investing," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 652-660, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Daniel Ramos-García & Carmen López-Martín & Raquel Arguedas-Sanz, 2023. "Climate transition risk in determining credit risk: evidence from firms listed on the STOXX Europe 600 index," Empirical Economics, Springer, vol. 65(5), pages 2091-2114, November.
    2. Shashwat Mishra & Rishabh Raj & Siddhartha P. Chakrabarty, 2023. "Green portfolio optimization: A scenario analysis and stress testing based novel approach for sustainable investing in the paradigm Indian markets," Papers 2305.16712, arXiv.org.
    3. Mario Bajo & Emilio Rodríguez, 2022. "Integrating the carbon footprint into the construction of corporate bond portfolios," Working Papers 2226, Banco de España.
    4. Siddhartha P. Chakrabarty & Suryadeepto Nag, 2023. "Risk measures and portfolio analysis in the paradigm of climate finance: a review," SN Business & Economics, Springer, vol. 3(3), pages 1-22, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Carrión-Flores, Carmen E. & Innes, Robert, 2010. "Environmental innovation and environmental performance," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 27-42, January.
    2. Richard Hunt & Lauren Ortiz-Hunt, 2018. "Deinstitutionalization through Business Model Evolution: Women Entrepreneurs in the Middle East and North Africa," Chapters, in: Ladislav Mura (ed.), Entrepreneurship - Development Tendencies and Empirical Approach, IntechOpen.
    3. Na Li Dawson & Kathleen Segerson, 2008. "Voluntary Agreements with Industries: Participation Incentives with Industry-Wide Targets," Land Economics, University of Wisconsin Press, vol. 84(1), pages 97-114.
    4. Aaron K. Chatterji & David I. Levine & Michael W. Toffel, 2009. "How Well Do Social Ratings Actually Measure Corporate Social Responsibility?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(1), pages 125-169, March.
    5. Delgado, Michael S. & Khanna, Neha, 2015. "Voluntary Pollution Abatement and Regulation," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 44(1), pages 1-20, April.
    6. Victor Hiller & Natacha Raffin, 2017. "Corporate social responsibility and workers’ motivation at the industry equilibrium," Post-Print hal-02366298, HAL.
    7. Blackman, Allen & Guerrero, Santiago, 2012. "What drives voluntary eco-certification in Mexico?," Journal of Comparative Economics, Elsevier, vol. 40(2), pages 256-268.
    8. Johannes Urpelainen, 2011. "Frontrunners and Laggards: The Strategy of Environmental Regulation under Uncertainty," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 50(3), pages 325-346, November.
    9. Mireille Chiroleu‐Assouline & Thomas P. Lyon, 2020. "Merchants of doubt: Corporate political action when NGO credibility is uncertain," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(2), pages 439-461, April.
    10. Shon R. Hiatt & Jake B. Grandy & Brandon H. Lee, 2015. "Organizational Responses to Public and Private Politics: An Analysis of Climate Change Activists and U.S. Oil and Gas Firms," Organization Science, INFORMS, vol. 26(6), pages 1769-1786, December.
    11. Tolhurst, Tor N. & DeMars, Christopher & Klonsky, Karen & Goodhue, Rachael E. & Zhang, Minghua, 2017. "Are Farmers Good Neighbors? Self-Regulation of Pesticide Applications near Schools and Daycares in California," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258393, Agricultural and Applied Economics Association.
    12. Thomas P. Lyon & John W. Maxwell, 2004. "Astroturf: Interest Group Lobbying and Corporate Strategy," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 561-597, December.
    13. Bednarek, Ziemowit & Patel, Pratish, 2018. "Understanding the outperformance of the minimum variance portfolio," Finance Research Letters, Elsevier, vol. 24(C), pages 175-178.
    14. Pierre Fleckinger & Matthieu Glachant, 2009. "La responsabilité sociale de l’entreprise et les accords volontaires sont-ils complémentaires ?," Économie et Prévision, Programme National Persée, vol. 190(4), pages 95-105.
    15. Joshua Tasoff, 2014. "Placation and provocation," Rationality and Society, , vol. 26(1), pages 73-104, February.
    16. Robert Innes & Abdoul G. Sam, 2008. "Voluntary Pollution Reductions and the Enforcement of Environmental Law: An Empirical Study of the 33/50 Program," Journal of Law and Economics, University of Chicago Press, vol. 51(2), pages 271-296, May.
    17. David M. McEvoy & John K. Stranlund, 2007. "Costly Enforcement of Voluntary Environmental Agreements with Industries," Working Papers 07-15, Department of Economics, Appalachian State University.
    18. Norah Mackendrick, 2005. "The role of the state in voluntary environmental reform: A case study of public land," Policy Sciences, Springer;Society of Policy Sciences, vol. 38(1), pages 21-44, March.
    19. Arguedas, Carmen & Rousseau, Sandra, 2012. "Learning about compliance under asymmetric information," Resource and Energy Economics, Elsevier, vol. 34(1), pages 55-73.
    20. Michał Krawczyk & Krzysztof Szczygielski, 2019. "Do professions curb free-riding? An experiment," European Journal of Law and Economics, Springer, vol. 47(3), pages 361-376, June.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2101.10635. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.