A1176
Title: Climate risk and investment in equities in Europe: A panel SVAR approach
Authors: Fabio Parla - University of Palermo (Italy) [presenting]
Andrea Cipollini - University of Palermo (Italy)
Abstract: Data on European stocks is used to construct a green-minus-brown portfolio hedging climate risk and evaluate its performance in terms of cumulative expected and unexpected returns. A Structural Panel VAR fitted to one month return and realized volatility is computed for 40 constituents of a green portfolio (the Refinitiv's low carbon emission portfolio) and 41 constituents of a brown portfolio (underlying the Oil\&Gas and Utilities industry sectors of the STOXX Europe 600). The common shocks underlying the cross-sectional averages, interpreted as portfolio shocks, are retrieved in the first stage of the analysis and are used to control for cross-sectional dependence. The historical decomposition (for cumulative returns) is computed in the second stage of the analysis, and in line with a prior study, an outperformance of the expected component of the brown portfolio is found relative to the one for the green portfolio, and an outperformance of the green portfolio when the focus is on the unexpected component. The top 5 green portfolio's constituents (those showing the worst performance in terms of expected return) are also assessed, as well as the role played by idiosyncratic shocks in shaping their outperformance in terms of unexpected components. Finally, after exploiting the non-Gaussian properties of the financial time series for statistical identification, ex-post idiosyncratic shocks are interpreted as financial leverage and risk aversion.
