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Climate risk and the idiosyncratic volatility puzzle

Author

Listed:
  • Kasun Perera
  • Duminda Kuruppuarachchi
  • Sriyalatha Kumarasinghe
  • Muhammad Tahir Suleman

Abstract

Our study offers intriguing evidence on the much-debated idiosyncratic volatility (IdVol) puzzle from a climate risk perspective. Using a set of US-listed stocks from July 2010 to December 2019, our robust portfolio- and stock-level results reveal that the IdVol puzzle exists in both carbon-footprint-disclosing and non-disclosing stocks. Furthermore, investors do not perceive a significant difference in the IdVol puzzle between carbon-footprint-disclosing and non-disclosing stocks. However, the IdVol puzzle is concentrated in high-carbon-intensive stocks as far as those carbon-footprint-disclosing stocks are concerned, implying the combined effect of investor attention and ethical screening of stocks. Overall, our results substantiate the specific impact of climate-related risks on asset pricing decisions.

Suggested Citation

  • Kasun Perera & Duminda Kuruppuarachchi & Sriyalatha Kumarasinghe & Muhammad Tahir Suleman, 2025. "Climate risk and the idiosyncratic volatility puzzle," Applied Economics, Taylor & Francis Journals, vol. 57(27), pages 3689-3708, June.
    • Handle: RePEc:taf:applec:v:57:y:2025:i:27:p:3689-3708
    DOI: 10.1080/00036846.2024.2337816
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