Hedging financial risks with a climate index based on EU ETS firms
This paper proposes an EU ETS-based equity index using verified emissions to hedge climate and carbon-transition risks across asset classes.
What it examines
The paper proposes an EU ETS index based on verified emissions of listed firms, using DCC-GARCH to estimate hedge ratios, optimal weights, and hedge effectiveness. It aims to offer investors a transparent, performance-based tool to hedge climate risks in carbon-intensive sectors while addressing sustainability and regulatory concerns.
What it concludes
The study finds that, although hedging with the EU ETS index is costlier than using EUA, it achieves better risk reduction. Its applications include portfolio optimization, risk management, and tracking corporate climate performance, with future research suggested to explore broader asset classes and enhanced risk metrics.
Evidence objects
The study builds an equity index for EU ETS-regulated firms using verified emissions, offering transparent hedging versus traditional EUA prices or ESG scores despite higher hedge ratios and greater costs.
key_findings bullet 1 · key_findings · validation V0
Using an innovative dynamic conditional correlation GARCH model, researchers determine hedge ratios, optimal weights, and exceptional hedge effectiveness across diverse assets including stocks, bonds, and volatile instruments such as Bitcoin.
key_findings bullet 2 · key_findings · validation V0
The authors introduce a verified emissions-based weighting methodology that avoids inconsistencies in self-reported data, with analysis spanning 203 firms, multiple EU ETS phases, and unexpected trends in index weight dynamics.
key_findings bullet 3 · key_findings · validation V0
The paper pioneers a fresh integration of climate risk via an EU ETS-based climate index into Quantitative Risk Management. By employing advanced econometric techniques such as $DCC-GARCH$, it innovatively fuses climate and traditional financial risk management. This novel perspective offers significant impact and interest to quantitative finance and research fields.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
- This paper proposes a stock market index that captures the environmental performance of firms regulated by the European Union Emissions Trading System (EU ETS). …
Source row: 1018 · abstract type: snippet