Unlocking ESG Premium from Options

69 Pages Posted: 8 Jul 2021 Last revised: 29 Apr 2022

See all articles by Jie Cao

Jie Cao

The Hong Kong Polytechnic University - School of Accounting and Finance

Amit Goyal

University of Lausanne; Swiss Finance Institute

Xintong Zhan

Department of Finance, School of Management, Fudan University

Weiming Elaine Zhang

The Chinese University of Hong Kong (CUHK)

Date Written: April 25, 2022

Abstract

We find that option expensiveness, as measured by implied volatility, is higher for low-ESG stocks, showing that investors pay a premium in the option market to hedge ESG-related uncertainty. Using delta-hedged option returns, we estimate this ESG premium to be about 0.3% per month. All three components of ESG contribute to option pricing. The effect of ESG performance heightens after the announcement of Paris Agreement, after speeches of Greta Thunberg, and in the aftermath of Me-Too movement. We find that investors pay ESG premium to hedge volatility, jump, and other higher moment risks. The influence of ESG on option premia is stronger for firms that are closer to end-consumers, facing severer product competition, with higher investors’ ESG awareness, and without corporate hedging activity.

Keywords: ESG, implied volatility, delta-hedged option return

JEL Classification: G12, G14, G41, M14

Suggested Citation

Cao, Jie and Goyal, Amit and Zhan, Xintong and Zhang, Weiming Elaine, Unlocking ESG Premium from Options (April 25, 2022). Swiss Finance Institute Research Paper No. 21-39, Available at SSRN: https://ssrn.com/abstract=3878123 or http://dx.doi.org/10.2139/ssrn.3878123

Jie Cao

The Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom, Kowloon
Hong Kong

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

Amit Goyal (Contact Author)

University of Lausanne ( email )

Batiment Extranef 226
Lausanne, Vaud CH-1015
Switzerland
+41 21 692 3676 (Phone)
+41 21 692 3435 (Fax)

HOME PAGE: http://www.hec.unil.ch/agoyal/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Xintong Zhan

Department of Finance, School of Management, Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

HOME PAGE: http://sites.google.com/view/xintongzhan

Weiming Elaine Zhang

The Chinese University of Hong Kong (CUHK) ( email )

Cheng Yu Tung Building
Shatin
Hong Kong

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

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