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Hedging Climate Change News

Author

Listed:
  • Robert F. Engle III
  • Stefano Giglio
  • Bryan T. Kelly
  • Heebum Lee
  • Johannes Stroebel

Abstract

We propose and implement a procedure to dynamically hedge climate change risk. To create our hedge target, we extract innovations from climate news series that we construct through textual analysis of high-dimensional data on newspaper coverage of climate change. We then use a mimicking portfolio approach based on a large panel of equity returns to build climate change hedge portfolios. We discipline the exercise by using third-party ESG scores of firms to model their climate risk exposures. We show that this approach yields parsimonious and industry-balanced portfolios that perform well in hedging innovations in climate news both in-sample and out-of-sample. The resulting hedge portfolios outperform alternative hedging strategies based primarily on industry tilts. We discuss multiple directions for future research on financial approaches to managing climate risk.

Suggested Citation

  • Robert F. Engle III & Stefano Giglio & Bryan T. Kelly & Heebum Lee & Johannes Stroebel, 2019. "Hedging Climate Change News," NBER Working Papers 25734, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25734
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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