Decomposing Climate Risks in Stock Markets

Download or read book Decomposing Climate Risks in Stock Markets written by Chengyu Huang and published by International Monetary Fund. This book was released on 2023-06-30 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: Climate change poses an unprecedented challenge to the world economy and the global financial system. This paper sets out to understand and quantify the impact of climate mitigation, with a focus on climate-related news, which represents an important information source that investors use to revise their subjective assessments of climate risks. Using full-text data from Financial Times from January 2005 to March 2022, we develop machine learning-based indicators to measure risks from climate mitigation, and the direction of the risk is identified through manual labels. The documented risk premium indicates that climate mitigation news has been partially priced in the Canadian stock market. More specifically, stock prices react positively to market-wide climate-favorable news but they do not react negatively to climate-unfavorable news. The results are robust to different model specifications and across equity markets.