A0324
Title: Tail sensitivity of stocks to carbon risk: A sectoral analysis
Authors: M-Dolores Robles - Universidad Complutense de Madrid (Spain) [presenting]
Laura Garcia-Jorcano - Universidad de Castilla-La Mancha (Spain)
Juan-Angel Jimenez-Martin - Complutense of Madrid (Spain)
Abstract: The tail risk dependence of industry returns and carbon-related climate risk as proxied by the CO2 emission allowance returns is analyzed. We estimate the tail carbon-betas in four scenarios in which extreme conditions in both markets occur together and find asymmetric tail dependence that is also different in the last two phases of the EU-ETS implementation. The study of 60 US industries from 2009 to 2020 reveals that tail dependence is stronger when the industry is under upside risk, and the carbon market signals a brown state than when the industry is under downside risk. The carbon market signals a green state. The tail dependence in the other two scenarios shows less asymmetry, being the tail carbon-sensitivities more similar in magnitude in this case. The results indicate a stronger dependence when the industry is under downside risk, and the carbon market signals a brown state than when the industry is under upside risk, and the carbon market signals a green state. Overall, our findings point out that the conditions in both markets determine investor awareness about carbon-related climate risk.
