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Dissecting Climate Risks: Are they Reflected in Stock Prices?

65 Pages Posted: 3 Mar 2021 Last revised: 23 May 2022

See all articles by Renato Faccini

Renato Faccini

Danmarks Nationalbank

Rastin Matin

National Bank of Denmark

George S. Skiadopoulos

University of Piraeus, Department of Banking and Financial Management; Queen Mary, University of London, School of Economics and Finance

Date Written: May 20, 2022

Abstract

We provide first-time evidence on whether market-wide physical or transition climate risks are priced in U.S. stocks. Textual and narrative analysis of Reuters climate-change news over 2000-2018, uncovers four novel risk factors related to natural disasters, global warming, international summits, and U.S. climate policy, respectively. Only the climate-policy factor is priced, especially post-2012. The documented risk premium is consistent with investors hedging the imminent transition risks from government intervention, rather than the direct risks from climate change itself. Firms that are most exposed to transition risks tend to be polluting businesses which show no strong intention of becoming greener.

Keywords: Physical and transition climate risks, Latent Dirichlet Allocation, Cross-section of stock returns, Textual analysis

JEL Classification: C63, E58, G12, G18, Q5

Suggested Citation

Faccini, Renato and Matin, Rastin and Skiadopoulos, George and Skiadopoulos, George, Dissecting Climate Risks: Are they Reflected in Stock Prices? (May 20, 2022). Available at SSRN: https://ssrn.com/abstract=3795964 or http://dx.doi.org/10.2139/ssrn.3795964

Renato Faccini

Danmarks Nationalbank ( email )

Havnegade 5
DK-1093 Copenhagen K
Denmark

Rastin Matin

National Bank of Denmark ( email )

Havnegade 5
DK-1093 Copenhagen K
Denmark

George Skiadopoulos (Contact Author)

University of Piraeus, Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

HOME PAGE: http://https://sites.google.com/view/george-skiadopoulos

Queen Mary, University of London, School of Economics and Finance

Lincoln's Inn Fields
Mile End Rd.
London, E1 4NS
United Kingdom

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