Carbon Dioxide and Asset Pricing: Evidence from International Stock Markets

36 Pages Posted: 10 Jan 2020

See all articles by Zhuo Chen

Zhuo Chen

Tsinghua University; Tsinghua University - PBC School of Finance

Jinyu Liu

University of International Business and Economics (UIBE) - School of Banking and Finance

Andrea Lu

The University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Libin Tao

University of International Business and Economics - School of Banking and Finance

Date Written: December 20, 2019

Abstract

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

Chen, Zhuo and Liu, Jinyu and Lu, Andrea Y. and Tao, Libin, Carbon Dioxide and Asset Pricing: Evidence from International Stock Markets (December 20, 2019). Available at SSRN: https://ssrn.com/abstract=3507147 or http://dx.doi.org/10.2139/ssrn.3507147

Zhuo Chen (Contact Author)

Tsinghua University ( email )

43 Chengfu Road
Beijing, 100083
China

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Jinyu Liu

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street, Chaoyang District
Beijing, 100029
China
+8613720001753 (Phone)

HOME PAGE: http://sbf.uibe.edu.cn/szdw/xyjs/zc/57847.htm

Andrea Y. Lu

The University of Melbourne - Department of Finance ( email )

Level 12, 198 Berkeley Street
Parkville, Victoria 3010 3010
Australia
+61383443326 (Phone)
+61383446914 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Libin Tao

University of International Business and Economics - School of Banking and Finance ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

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