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Climate risk exposure and the cross-section of Chinese stock returns

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  • Zhang, Yaojie
  • He, Mengxi
  • Liao, Cunfei
  • Wang, Yudong

Abstract

This paper examines the role of climate risk exposure in the cross-sectional pricing of individual stocks in China. We find a premium of low climate risk exposure: stocks with low climate risk exposure significantly outperform those with high climate risk exposure by 0.83% to 0.90% per month in the future, on a risk-adjusted basis. Results of Fama-MacBeth regressions show that the premium of low climate risk exposure remains after controlling for well-known pricing factors. Moreover, a range of alternative settings confirms that the premium is extremely robust. Finally, climate risk exposure is a combination of pricing factors such as profitability and investment, which provides potential explanations for our results. Our study documents the importance of climate risk in cross-sectional pricing in the Chinese stock market.

Suggested Citation

  • Zhang, Yaojie & He, Mengxi & Liao, Cunfei & Wang, Yudong, 2023. "Climate risk exposure and the cross-section of Chinese stock returns," Finance Research Letters, Elsevier, vol. 55(PB).
    • Handle: RePEc:eee:finlet:v:55:y:2023:i:pb:s1544612323003598
    DOI: 10.1016/j.frl.2023.103987
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    Cited by:

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    5. Liu, Peng & Chen, Yaru & Mu, Yan, 2024. "The impact of climate risk aversion on agribusiness share price volatility," Finance Research Letters, Elsevier, vol. 61(C).

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    More about this item

    Keywords

    Climate risk; Cross-section of stock returns; Chinese stock market; Return predictability; Fama-MacBeth regressions;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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