Institutional Affiliation: NYU Stern
|Hedging Climate Change News|
with Robert F. Engle III, Stefano Giglio, Bryan T. Kelly, Johannes Stroebel: w25734
We propose and implement a procedure to dynamically hedge climate change risk. To create our hedge target, we extract innovations from climate news series that we construct through textual analysis of high-dimensional data on newspaper coverage of climate change. We then use a mimicking portfolio approach based on a large panel of equity returns 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. The resulting hedge portfolios outperform alternative hedging strategies based primarily on industry tilts. We discuss multiple dire...
Published: Robert F Engle & Stefano Giglio & Bryan Kelly & Heebum Lee & Johannes Stroebel & Andrew Karolyi, 2020. "Hedging Climate Change News," Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1184-1216.