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Hedging climate risk: The role of green energy exchange-traded funds

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  • Yin, Libo
  • Zhang, Jier
  • Wang, Wensheng
  • Cao, Hong

Abstract

This study identifies the hedging role of green energy ETF (GETF) funds on climate risk. By employing the “bag-of-words” approach to quantify the uncertainty of underlying ETF assets and mapping them to the ETF level, we find that China’s GETFs effectively hedge climate risk. Specifically, these hedging effects are particularly pronounced in portfolios constructed by opportunity and regulatory uncertainty, whereas those of physical uncertainty are negligible. Furthermore, this hedging capability is primarily in the short and medium terms and is associated with increased climate risk. Notably, GETFs perform excellently in environments with low levels of liquidity, volatility, and non-fundamental trading activities. Overall, owing to their risk-return profile, GETFs can be a rewarding alternative to BETFs for investors in hedging climate risk.

Suggested Citation

  • Yin, Libo & Zhang, Jier & Wang, Wensheng & Cao, Hong, 2025. "Hedging climate risk: The role of green energy exchange-traded funds," Research in International Business and Finance, Elsevier, vol. 77(PA).
    • Handle: RePEc:eee:riibaf:v:77:y:2025:i:pa:s0275531925001552
    DOI: 10.1016/j.ribaf.2025.102899
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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