Factor mimicking portfolios for climate risk

Gianluca De Nard, Robert Engle and Bryan Kelly

No 429, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: We propose and implement a procedure to optimally hedge climate change risk. First, we construct climate risk indices through textual analysis of newspapers. Second, we present a new approach to compute factor mimicking portfolios to build climate risk hedge portfolios. The new mimicking portfolio approach is much more efficient than traditional sorting or maximum correlation approaches by taking into account new methodologies of estimating large-dimensional covariance matrices in short samples. In an extensive empirical out-of-sample performance test, we demonstrate the superior all-around performance delivering markedly higher and statistically significant alphas and betas with the climate risk indices.

Keywords: Climate change; factor model; portfolio selection; sustainable portfolio (search for similar items in EconPapers)
JEL-codes: C58 G11 G18 Q54 (search for similar items in EconPapers)
Date: 2023-03, Revised 2024-03
New Economics Papers: this item is included in nep-env and nep-rmg
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Factor-Mimicking Portfolios for Climate Risk (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:429

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