Carbon Dioxide and Asset Pricing: Evidence from International Stock Markets
36 Pages Posted: 10 Jan 2020
Date Written: December 20, 2019
We use carbon dioxide (CO2) emissions growth to measure consumption risk within a consumption-based capital asset pricing model (CCAPM) framework. Given the comprehensive worldwide coverage of CO2 emissions, this measure allows us to use the full history of stock market data in the United States, Europe, the world, and fifteen international markets. For the United States (Europe/the world), we are able to explain the observed equity market premium with a relative risk aversion (RRA) of 6 (10/12), which is less than half the size of that estimated using the canonical expenditures-based consumption growth measure. The average estimated RRA across fifteen other international markets is 7. We also find evidence that the growth of CO2 emissions is a priced risk factor that captures the cross section of stock portfolio returns.
Keywords: International Asset Pricing, Consumption-Based Capital Asset Pricing Model, Carbon Dioxide Emissions
JEL Classification: G12, Q43
Suggested Citation: Suggested Citation