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Climate Change News Risk and Corporate Bond Returns

Published online by Cambridge University Press:  16 September 2020

Thanh D. Huynh  and
Ying Xia Open the ORCID record for Ying Xia [Opens in a new window]
Thanh D. Huynh
Affiliation:
Monash University, Monash Business School, Department of Banking and Finance thanh.huynh@monash.edu
Ying Xia*
Affiliation:
Monash University, Monash Business School, Department of Banking and Finance
*
ying.xia@monash.edu (corresponding author)
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Abstract

We examine whether climate change news risk is priced in corporate bonds. We estimate bond covariance with a climate change news index and find that bonds with a higher climate change news beta earn lower future returns, consistent with the asset pricing implications of demand for bonds with high potential to hedge against climate risk. Moreover, when investors are concerned about climate risk, they are willing to pay higher prices for bonds issued by firms with better environmental performance. Our findings suggest that corporate policies aimed at improving environmental performance pay off when the market is concerned about climate change risk.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 6 , September 2021 , pp. 1985 - 2009
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We are grateful to Michael Barnett (the referee) and Hendrik Bessembinder (the editor) for their extremely helpful comments and suggestions. We also thank Stephen Brown, Roger Edelen, Bart Frijns, Neal Galpin, Michael Gofman, Zhiguo He, Juhani Linnainmaa, Christian Lundblad, Lyndon Moore, and Phong Ngo for their constructive comments. We thank Stefano Giglio and Johannes Stroebel for making the climate change news index data available. All errors are our own.

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