Abstract

Abstract We propose and implement a procedure to dynamically hedge climate change risk. We extract innovations from climate news series that we construct through textual analysis of newspapers. We then use a mimicking portfolio approach 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. We discuss multiple directions for future research on financial approaches to managing climate risk.

Keywords

Climate changeNewspaperHedgePortfolioSample (material)Construct (python library)Climate riskActuarial scienceBusinessEconometricsComputer scienceEconomicsFinanceAdvertising

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Publication Info

Year
2019
Type
article
Volume
33
Issue
3
Pages
1184-1216
Citations
1117
Access
Closed

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Robert F. Engle, Stefano Giglio, Bryan Kelly et al. (2019). Hedging Climate Change News. Review of Financial Studies , 33 (3) , 1184-1216. https://doi.org/10.1093/rfs/hhz072

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DOI
10.1093/rfs/hhz072