Climate risk and the idiosyncratic volatility puzzle

Kasun Perera, Duminda Kuruppuarachchi, Sriyalatha Kumarasinghe and Muhammad Tahir Suleman

Applied Economics, 2025, vol. 57, issue 27, 3689-3708

Abstract: Our study offers intriguing evidence on the much-debated idiosyncratic volatility (IdVol) puzzle from a climate risk perspective. Using a set of US-listed stocks from July 2010 to December 2019, our robust portfolio- and stock-level results reveal that the IdVol puzzle exists in both carbon-footprint-disclosing and non-disclosing stocks. Furthermore, investors do not perceive a significant difference in the IdVol puzzle between carbon-footprint-disclosing and non-disclosing stocks. However, the IdVol puzzle is concentrated in high-carbon-intensive stocks as far as those carbon-footprint-disclosing stocks are concerned, implying the combined effect of investor attention and ethical screening of stocks. Overall, our results substantiate the specific impact of climate-related risks on asset pricing decisions.

Date: 2025
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DOI: 10.1080/00036846.2024.2337816

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