What drives green betas? Climate uncertainty or speculation

Onur Polat, Riza Demirer and İbrahim Halil Ekşi

Finance Research Letters, 2024, vol. 60, issue C

Abstract: Examining green equity sectors including geothermal, wind, solar, bioclean, and clean energy within a DCC-MIDAS framework, we show that green betas are predominantly driven by speculative sentiment in technology stocks rather than climate uncertainty. We argue that the lottery-like features of green assets, whose values are highly tied to the success of new technologies, result in a negative risk-mispricing relationship driven by technology speculation. Further economic analysis shows that a forward-looking investment strategy conditional on technology sentiment yields improved risk-adjusted returns for passive equity investors, particularly following the 2016 Paris Agreement. Our findings establish a new speculation-based channel for characterizing the systematic risk of green assets.

Keywords: Beta; Climate risk; Speculative sentiment; Asymmetric DCC-GARCH; Reverse MIDAS (search for similar items in EconPapers)
JEL-codes: C22 D81 G15 Q42 Q54 Q56 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:60:y:2024:i:c:s1544612323012424

DOI: 10.1016/j.frl.2023.104870

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