Enrica Archetti (MS&E): Hedging Climate Change News

Enrica Archetti will present the following paper.

Title: Hedging Climate Change News (link here)

Authors: Robert F. Engle III, Stefano Giglio, Bryan T. Kelly, Heebum Lee, Johannes Stroebel 

Abstract:
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 directions for future research on financial approaches to managing climate risk..