NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Hedging Climate Change News

Robert F. Engle III, Stefano Giglio, Bryan T. Kelly, Heebum Lee, Johannes Stroebel

NBER Working Paper No. 25734
Issued in April 2019
NBER Program(s):Asset Pricing, Corporate Finance, Environment and Energy Economics, Economic Fluctuations and Growth

We propose and implement a procedure to dynamically hedge climate change risk. To create our hedge target, we extract innovations from climate news series that we construct through textual analysis of high-dimensional data on newspaper coverage of climate change. We then use a mimicking portfolio approach based on a large panel of equity returns to build climate change hedge portfolios. We discipline the exercise by using third-party ESG scores of firms to model their climate risk exposures. We show that this approach yields parsimonious and industry-balanced portfolios that perform well in hedging innovations in climate news both in-sample and out-of-sample. The resulting hedge portfolios outperform alternative hedging strategies based primarily on industry tilts. We discuss multiple directions for future research on financial approaches to managing climate risk.

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Document Object Identifier (DOI): 10.3386/w25734

 
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