Climate risk and the idiosyncratic volatility puzzle

Kasun Perera; Duminda Kuruppuarachchi; Sriyalatha Kumarasinghe; Muhammad Tahir Suleman

doi:10.1080/00036846.2024.2337816

Climate risk and the idiosyncratic volatility puzzle

Kasun Perera^*, Duminda Kuruppuarachchi, Sriyalatha Kumarasinghe, Muhammad Tahir Suleman

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

Abstract

Our study offers intriguing evidence on the much-debated idiosyncratic volatility (IdVol) puzzle from a climate risk perspective. Using a set of US-listed stocks from July 2010 to December 2019, our robust portfolio- and stock-level results reveal that the IdVol puzzle exists in both carbon-footprint-disclosing and non-disclosing stocks. Furthermore, investors do not perceive a significant difference in the IdVol puzzle between carbon-footprint-disclosing and non-disclosing stocks. However, the IdVol puzzle is concentrated in high-carbon-intensive stocks as far as those carbon-footprint-disclosing stocks are concerned, implying the combined effect of investor attention and ethical screening of stocks. Overall, our results substantiate the specific impact of climate-related risks on asset pricing decisions.

Original language	English
Journal	Applied Economics
DOIs	https://doi.org/10.1080/00036846.2024.2337816
State	Accepted/In press - 2024
Externally published	Yes

Bibliographical note

Publisher Copyright:
© 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.

Keywords

carbon disclosure
carbon emissions intensity
climate risk
cross-sectional stock returns
Idiosyncratic volatility

ASJC Scopus subject areas

Economics and Econometrics

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1080/00036846.2024.2337816

Cite this

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title = "Climate risk and the idiosyncratic volatility puzzle",

abstract = "Our study offers intriguing evidence on the much-debated idiosyncratic volatility (IdVol) puzzle from a climate risk perspective. Using a set of US-listed stocks from July 2010 to December 2019, our robust portfolio- and stock-level results reveal that the IdVol puzzle exists in both carbon-footprint-disclosing and non-disclosing stocks. Furthermore, investors do not perceive a significant difference in the IdVol puzzle between carbon-footprint-disclosing and non-disclosing stocks. However, the IdVol puzzle is concentrated in high-carbon-intensive stocks as far as those carbon-footprint-disclosing stocks are concerned, implying the combined effect of investor attention and ethical screening of stocks. Overall, our results substantiate the specific impact of climate-related risks on asset pricing decisions.",

keywords = "carbon disclosure, carbon emissions intensity, climate risk, cross-sectional stock returns, Idiosyncratic volatility",

author = "Kasun Perera and Duminda Kuruppuarachchi and Sriyalatha Kumarasinghe and Suleman, {Muhammad Tahir}",

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year = "2024",

doi = "10.1080/00036846.2024.2337816",

language = "English",

journal = "Applied Economics",

issn = "0003-6846",

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T1 - Climate risk and the idiosyncratic volatility puzzle

AU - Perera, Kasun

AU - Kuruppuarachchi, Duminda

AU - Kumarasinghe, Sriyalatha

AU - Suleman, Muhammad Tahir

PY - 2024

Y1 - 2024

N2 - Our study offers intriguing evidence on the much-debated idiosyncratic volatility (IdVol) puzzle from a climate risk perspective. Using a set of US-listed stocks from July 2010 to December 2019, our robust portfolio- and stock-level results reveal that the IdVol puzzle exists in both carbon-footprint-disclosing and non-disclosing stocks. Furthermore, investors do not perceive a significant difference in the IdVol puzzle between carbon-footprint-disclosing and non-disclosing stocks. However, the IdVol puzzle is concentrated in high-carbon-intensive stocks as far as those carbon-footprint-disclosing stocks are concerned, implying the combined effect of investor attention and ethical screening of stocks. Overall, our results substantiate the specific impact of climate-related risks on asset pricing decisions.

AB - Our study offers intriguing evidence on the much-debated idiosyncratic volatility (IdVol) puzzle from a climate risk perspective. Using a set of US-listed stocks from July 2010 to December 2019, our robust portfolio- and stock-level results reveal that the IdVol puzzle exists in both carbon-footprint-disclosing and non-disclosing stocks. Furthermore, investors do not perceive a significant difference in the IdVol puzzle between carbon-footprint-disclosing and non-disclosing stocks. However, the IdVol puzzle is concentrated in high-carbon-intensive stocks as far as those carbon-footprint-disclosing stocks are concerned, implying the combined effect of investor attention and ethical screening of stocks. Overall, our results substantiate the specific impact of climate-related risks on asset pricing decisions.

KW - carbon disclosure

KW - carbon emissions intensity

KW - climate risk

KW - cross-sectional stock returns

KW - Idiosyncratic volatility

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DO - 10.1080/00036846.2024.2337816

M3 - Article

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JO - Applied Economics

JF - Applied Economics

ER -

Climate risk and the idiosyncratic volatility puzzle

Abstract

Bibliographical note

Keywords

ASJC Scopus subject areas

UN SDGs

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