Hedging Climate Change News
48 Pages Posted: 25 Jul 2019
Date Written: 2019
We propose and implement a procedure to dynamically hedge climate change risk. We extract innovations from climate news series that we construct through textual analysis of newspapers. We then use a mimicking portfolio approach 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. We discuss multiple directions for future research on financial approaches to managing climate risk.
Keywords: climate risk
JEL Classification: G110, G180, Q540
Suggested Citation: Suggested Citation