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Dissecting climate risks: Are they reflected in stock prices?

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  • Faccini, Renato
  • Matin, Rastin
  • Skiadopoulos, George

Abstract

We provide first-time evidence on whether market-wide physical or transition climate risks are priced in U.S. stocks. Textual and narrative analysis of Reuters climate-change news over January 1st 2000 – December 31st 2018 uncovers four novel risk measures related to natural disasters, global warming, international summits, and U.S. climate policy, respectively. Only the climate-policy factor is priced, especially post-2012. The documented risk premium is consistent with investors hedging the imminent transition risks from government intervention, rather than the direct risks from climate change itself.

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  • Faccini, Renato & Matin, Rastin & Skiadopoulos, George, 2023. "Dissecting climate risks: Are they reflected in stock prices?," Journal of Banking & Finance, Elsevier, vol. 155(C).
    • Handle: RePEc:eee:jbfina:v:155:y:2023:i:c:s037842662300153x
    DOI: 10.1016/j.jbankfin.2023.106948
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    3. Santino Del Fava & Rangan Gupta & Christian Pierdzioch & Lavinia Rognone, 2023. "Forecasting International Financial Stress: The Role of Climate Risks," Working Papers 202329, University of Pretoria, Department of Economics.

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    More about this item

    Keywords

    Physical risks; Transition risks; Latent Dirichlet allocation; Cross-section of stock returns; Textual analysis;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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