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When do investors go green? Evidence from a time-varying asset-pricing model

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  • Alessi, Lucia
  • Ossola, Elisa
  • Panzica, Roberto

Abstract

This study employs individual stock returns to examine the evolution of the greenium, which is the risk premium linked to firms’ carbon emissions and environmental transparency. We estimate an asset-pricing model with time-varying risk premia, in which the greenium is associated with a priced ‘greenness and transparency’ factor. We show that investors in the European equity market tend to accept lower returns, ceteris paribus, and hold greener and more transparent assets when economic shifts toward low carbon become more credible. This occurred after the Paris Agreement, the first global climate strike, and the announcement of the EU Green Deal. Opposite signals, such as increases in the prices of oil or critical minerals for the low-carbon transition, are associated with increases in the greenium; that is, more polluting firms are perceived as less risky.

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  • Alessi, Lucia & Ossola, Elisa & Panzica, Roberto, 2023. "When do investors go green? Evidence from a time-varying asset-pricing model," International Review of Financial Analysis, Elsevier, vol. 90(C).
  • Handle: RePEc:eee:finana:v:90:y:2023:i:c:s1057521923004143
    DOI: 10.1016/j.irfa.2023.102898
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    4. Andrea Cipollini & Fabio Parla, 2025. "Common Shocks and Climate Risk in European Equities," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 44(3), pages 1165-1192, April.
    5. Fiorillo, Paolo & Meles, Antonio & Salerno, Dario & Verdoliva, Vincenzo, 2024. "Geopolitical turmoil and investor green preference: Evidence from the corporate bond market," Journal of International Money and Finance, Elsevier, vol. 149(C).

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    More about this item

    Keywords

    Climate risk; Environmental disclosure; Conditional factor models; Asset pricing;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development

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