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What drives green betas? Climate uncertainty or speculation

Author

Listed:
  • Polat, Onur
  • Demirer, Riza
  • Ekşi, İbrahim Halil

Abstract

Examining green equity sectors including geothermal, wind, solar, bioclean, and clean energy within a DCC-MIDAS framework, we show that green betas are predominantly driven by speculative sentiment in technology stocks rather than climate uncertainty. We argue that the lottery-like features of green assets, whose values are highly tied to the success of new technologies, result in a negative risk-mispricing relationship driven by technology speculation. Further economic analysis shows that a forward-looking investment strategy conditional on technology sentiment yields improved risk-adjusted returns for passive equity investors, particularly following the 2016 Paris Agreement. Our findings establish a new speculation-based channel for characterizing the systematic risk of green assets.

Suggested Citation

  • Polat, Onur & Demirer, Riza & Ekşi, İbrahim Halil, 2024. "What drives green betas? Climate uncertainty or speculation," Finance Research Letters, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:finlet:v:60:y:2024:i:c:s1544612323012424
    DOI: 10.1016/j.frl.2023.104870
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    More about this item

    Keywords

    Beta; Climate risk; Speculative sentiment; Asymmetric DCC-GARCH; Reverse MIDAS;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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