A1599
Title: How does the US stock market react to climate concern shocks across frequencies: A wavelet analysis
Authors: Andrea Cipollini - University of Palermo (Italy) [presenting]
Iolanda Lo Cascio - University of Palermo (Italy)
Fabio Parla - University of Palermo (Italy)
Fabio Parla - University of Palermo (Italy)
Abstract: A number of studies on climate risk hedging through investment in equities have examined the performance of a green-minus-brown (GMB) portfolio of stocks in terms of both the expected and unexpected portfolio stock return performance. The recent study explains the observed outperformance of green stocks relative to brown stocks (for the U.S.) through the unexpected component of the GMB portfolio return, driven by innovation to a climate concern index. It is argued that another study assumes that the role played by climate concern is invariant to frequency. In line with another study, a spectral factor model is used to study whether systematic risk, in particular climate risk, varies across frequencies, hence whether a rise in climate concern develops especially over medium-term cycles (between 16 and 32 months) rather than short-term ones (between two and four months). The analysis is carried out by controlling for traditional Fama French factors and employing a factor decomposition of the covariance matrix of wavelet coefficients of the financial time series used using the MODWT filter.
