Climate Change News Risk and Corporate Bond Returns

Journal of Financial and Quantitative Analysis, forthcoming

72 Pages Posted: 7 May 2020 Last revised: 9 Feb 2021

See all articles by Thanh Huynh

Thanh Huynh

Monash University - Department of Banking and Finance

Ying Xia

Monash University - Monash Business School

Date Written: April 16, 2020

Abstract

We examine whether climate change news risk is priced in corporate bonds. We estimate bond covariance with climate change news index and find that bonds with a higher climate change news beta earn lower future returns, consistent with the asset pricing implications of demand for bonds with high potential to hedge against climate risk. Moreover, when investors are concerned about climate risk, they are willing to pay higher prices for bonds issued by firms with better environmental performance. Our findings suggest that corporate policies aimed at improving environmental performance pay off when the market is concerned about climate change risk.

Keywords: Corporate bond returns, climate change news index, intertemporal hedging demands, environmental performance

JEL Classification: G11, G12, G13, Q54

Suggested Citation

Huynh, Thanh D. and Xia, Ying, Climate Change News Risk and Corporate Bond Returns (April 16, 2020). Journal of Financial and Quantitative Analysis, forthcoming, Available at SSRN: https://ssrn.com/abstract=3577321

Thanh D. Huynh

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Ying Xia (Contact Author)

Monash University - Monash Business School ( email )

900 Dandenong Road
Caulfield Campus
Melbourne, Victoria 3145
Australia

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