NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Heebum Lee

44 West 4th Street
KMC 9-98 (Finance Department)
44 West 4th Street, KMC 9-98 (Finance Department)
New York, New 10012
United States

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: NYU Stern

NBER Working Papers and Publications

April 2019Hedging Climate Change News
with Robert F. Engle III, Stefano Giglio, Bryan T. Kelly, Johannes Stroebel: w25734
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 dire...
 
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