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A stochastic model for predicting the response time of green vs brown stocks to climate change news risk

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  • Fahmy, Hany

Abstract

We model the dynamic evolution of the attention process over the duration of climate change news events as a Brownian motion with an absorbing barrier, where attention to the news event ceases. In this framework, the duration of the underlying news event is a random variable whose probability distribution is the Inverse Gaussian (IG). We show that the IG distribution of news duration can be used to predict the response time of asset prices to climate news risk. We test the empirical validity of our model by constructing two novel climate news duration data sets: a daily duration and an hour-by-hour intra-news duration. At the daily frequency, our model predicts the response time of green versus brown firms’ stock prices to climate news risk. We demonstrate how this response time can enhance the precision of conventional risk management statistics, e.g., Value at Risk and expected shortfall, and in consequence improves the efficiency of managing firms’ exposures to such risk. At the high frequency, we extend the autoregressive conditional duration (ACD) model and show that, in an IG-ACD-GARCH framework, climate change news arrivals contribute to the volatility of green (but not brown) firms’ returns. This finding is attributed to public and investors’ concerns about climate change or to their belief that climate transition policies are ineffective in combating climate change.

Suggested Citation

  • Fahmy, Hany, 2025. "A stochastic model for predicting the response time of green vs brown stocks to climate change news risk," Journal of Banking & Finance, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:jbfina:v:178:y:2025:i:c:s037842662500127x
    DOI: 10.1016/j.jbankfin.2025.107507
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    1. Ting Wang & Chi‐Wei Su & Hsuling Chang & Oana‐Ramona Lobonţ, 2026. "Green Finance Under Climate Risks: A Comparative Analysis of Hedging Effects Between Green Bonds and Green Stocks," Australian Economic Papers, Wiley Blackwell, vol. 65(1), pages 83-93, March.

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    Keywords

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    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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