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Unlocking ESG Premium from Options

Swiss Finance Institute Research Paper No. 21-39

48 Pages Posted: 24 Mar 2023 Last revised: 28 Mar 2023

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

IE Business School - IE University

Date Written: January 12, 2023

Abstract

We find that option expensiveness, as measured by delta-hedged option returns, is higher for low-ESG stocks, indicating that investors pay a premium in the option market to hedge ESG-related uncertainty. We estimate this ESG premium to be about 0.3% per month. All three components of ESG contribute to option pricing. We find that investors pay the ESG premium to hedge jump risks, but not volatility risks. The effect of ESG performance is more prominent during the periods when the attention to ESG is higher and for firms that are more subject to ESG-related risks.

Keywords: ESG, risk premium, 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 (January 12, 2023). 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

IE Business School - IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain

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