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Unlocking ESG Premium from Options

Author

Listed:
  • Jie Cao

    (The Chinese University of Hong Kong (CUHK) - CUHK Business School)

  • Amit Goyal

    (University of Lausanne; Swiss Finance Institute)

  • Xintong Zhan

    (The Chinese University of Hong Kong (CUHK) - CUHK Business School)

  • Weiming Elaine Zhang

    (The Chinese University of Hong Kong (CUHK))

Abstract

We find that option expensiveness, as measured by implied volatility, is higher for low-ESG stocks, showing that investors pay a premium in the option market to hedge ESG-related uncertainty. Using delta-hedged option returns, we estimate this ESG premium to be about 0.3% per month. All three components of ESG contribute to option pricing. The effect of ESG performance heightens after the announcement of Paris Agreement, after speeches of Greta Thunberg, and in the aftermath of Me-Too movement. We find that investors pay ESG premium to hedge volatility, jump, and other higher moment risks. The influence of ESG on option premia is stronger for firms that are closer to end-consumers, facing severer product competition, with higher investors’ ESG awareness, and without corporate hedging activity.

Suggested Citation

  • Jie Cao & Amit Goyal & Xintong Zhan & Weiming Elaine Zhang, 2021. "Unlocking ESG Premium from Options," Swiss Finance Institute Research Paper Series 21-39, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2139
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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).

    More about this item

    Keywords

    ESG; implied volatility; delta-hedged option return;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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