Climate change,risk factors and stock returns: A review of the literature |
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Institution: | 1. College of Management and Economics, Tianjin University, China, No. 92 Weijin Road, Nankai District, Tianjin 300072, China;2. Asper School of Business, University of Manitoba, Canada, 181 Freedman Crescent, Winnipeg, Manitoba R3T 5V4, Canada;1. Gatton College of Business and Economics, University of Kentucky, Lexington, KY 40506, USA;2. Richard A. Chaifetz School of Business, Saint Louis University, St. Louis, MO 63108, USA |
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Abstract: | This article reviews how climate change could be considered an additional source of market risk. I discuss the types of data needed to analyse the climate risk drivers that shape the dynamics of the equity market. I present empirical evidence at both the macro and micro-level, analysing whether and to what extent the equity market prices climate change and related risks. Top-down and bottom-up approaches are compared to understand which climate risk is more likely to affect the cross-section of stock returns, both within and across sectors. Emphasis is also placed on investors’ beliefs about climate change risks, and the related asset pricing implications are analysed. I conclude by illustrating further directions for both empirical and theoretical research in the field of climate finance. |
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Keywords: | Climate change Physical risk Transition risk Asset pricing ESG |
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