The Pollution Premium

102 Pages Posted: 12 May 2020

See all articles by Po-Hsuan Hsu

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance

Kai Li

Peking University HSBC Business School

Chi-Yang Tsou

University of Manchester - Alliance Manchester Business School

Date Written: April 17, 2020

Abstract

This paper studies the asset pricing implications of industrial pollution. A long-short portfolio constructed from firms with high versus low toxic emission intensity within industry generates an average return of 4.42% per annum, which remains significant after controlling for risk factors. We examine several possible explanations for this pollution premium, which include policy uncertainty with respect to environmental regulations, relatedness to existing systematic risks, investors' preference for social responsibility, market sentiment, political connection, and corporate governance. Our empirical evidence suggests that the pollution premium is attributable to environmental policy uncertainty, which constitutes a systematic risk in a general equilibrium model.

Keywords: Toxic emissions, regime shift risk, uncertainty, environmental regulation, cross-section of stock returns

JEL Classification: E2, E3, E4, G1, Q5

Suggested Citation

Hsu, Po-Hsuan and Li, Kai and Tsou, Chi-Yang, The Pollution Premium (April 17, 2020). Available at SSRN: https://ssrn.com/abstract=3578215 or http://dx.doi.org/10.2139/ssrn.3578215

Po-Hsuan Hsu (Contact Author)

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
China

Kai Li

Peking University HSBC Business School ( email )

+86 755 26032023 (Phone)

HOME PAGE: http://sites.google.com/site/kailiwebpage

Chi-Yang Tsou

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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