Hedging Climate Change News

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

No 25734, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2019-04
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Published as Robert F Engle & Stefano Giglio & Bryan Kelly & Heebum Lee & Johannes Stroebel & Andrew Karolyi, 2020. "Hedging Climate Change News," Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1184-1216.

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Related works:
Journal Article: Hedging Climate Change News (2020)
Working Paper: Hedging climate change news (2019)
Working Paper: Hedging Climate Change News (2019)
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