Blind to carbon risk? An Analysis of Stock Market's Reaction to the Paris Agreement.

Monasterolo, Irene ORCID: https://orcid.org/0000-0001-5423-6009 and de Angelis, Luca (2019) Blind to carbon risk? An Analysis of Stock Market's Reaction to the Paris Agreement. WU Vienna University of Economics and Business, Vienna.

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Abstract

It is increasingly recognized that a transition to sustainable finance is crucial to scale up the low-carbon investments needed to achieve the global climate targets. A main barrier to portfolios' decarbonization is the lack of conclusive evidence on whether low-carbon investments add value to a portfolio, and on whether markets react to climate announcements by rewarding (penalizing) low-carbon (carbon-intensive) assets. To fill this gap, we develop an empirical analysis of the low-carbon and carbon-intensive indices for the EU, US and global stock markets. We test if financial markets are pricing the Paris Agreement (PA) by decreasing (increasing) the systematic risk and increasing (decreasing) the portfolio weights of low-carbon (carbon-intensive) indices afterwards. We find that after the PA the correlation among low-carbon and carbon-intensive indices drops. The overall systematic risk for the low-carbon indices decreases consistently, while stock markets' reaction is mild for most of carbon-intensive indices. Moreover, the weight of the low-carbon indices within an optimal portfolio tends to increase after the PA. This evidence suggests that stock market investors have started to consider low-carbon assets as an appealing investment opportunity after the PA but have not penalized yet carbon-intensive assets.

Item Type: Paper
Additional Information: IM acknowledges the partial support from the by the Austrian Climate Research Program's (ACRP) 10th call project "Analysis of Carbon Risks in Financial Markets and Austrian Portfolios" (RiskFinPorto), the Austrian National Bank's Maria Schaumeyer Habilitationstipendium, and the Research Prize 2019 of the "Econometric models of climate Change" conference.
Keywords: asset pricing, Paris Agreement announcement, low-carbon indices, carbon-intensive indices, systematic risk, Markowitz’s portfolio optimization, market model, Fama-French five-factor model, risk-adjusted return, stranded assets.
Classification Codes: JEL: C22, C58, Q54
Divisions: Departments > Sozioökonomie > Ecological Economics
Depositing User: Irene Monasterolo
Date Deposited: 29 Oct 2019 14:54
Last Modified: 06 Nov 2019 16:16
FIDES Link: https://bach.wu.ac.at/d/research/results/92466/
URI: https://epub.wu.ac.at/id/eprint/7260

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