Decomposing Climate Risks in Stock Markets

By Yuanchen Yang, Chengyu Huang, Yuchen Zhang

June 30, 2023

Preview Citation

Format: Chicago

Yuanchen Yang, Chengyu Huang, and Yuchen Zhang. Decomposing Climate Risks in Stock Markets, (USA: International Monetary Fund, 2023) accessed October 6, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Climate change poses an unprecedented challenge to the world economy and the global financial system. This paper sets out to understand and quantify the impact of climate mitigation, with a focus on climate-related news, which represents an important information source that investors use to revise their subjective assessments of climate risks. Using full-text data from Financial Times from January 2005 to March 2022, we develop machine learning-based indicators to measure risks from climate mitigation, and the direction of the risk is identified through manual labels. The documented risk premium indicates that climate mitigation news has been partially priced in the Canadian stock market. More specifically, stock prices react positively to market-wide climate-favorable news but they do not react negatively to climate-unfavorable news. The results are robust to different model specifications and across equity markets.

Subject: Asset prices, Climate change, Climate policy, Economic sectors, Environment, Oil sector, Prices

Keywords: Asset prices, Asset Pricing, Climate change, Climate Mitigation, Climate mitigation news, Climate news coverage, Climate news factor, Climate policy, EU stock market, Global, Machine Learning, Oil sector, Sorting strategy

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/141
Stock No:

WPIEA2023141
ISBN:

9798400244582
ISSN:

1018-5941

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