The Pricing of Climate Risks in Financial Markets

• Applicant: Professor Dr. Ole Wilms, since 7/2023
• Subject Area: Economic Policy, Applied Economics ; Economic Theory
• Term: since 2022
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 509502478

The goal of this project is to make substantial new empirical and theoretical contributions to climate finance, with a focus on asset pricing of climate-related risks. Specifically, we want to better understand how physical and transition risks are priced in stock and bond markets. For this, we will gather financial data and news articles to construct new indices of physical and transition risks as well as company-level news events about green announcements. We will use this data to analyze differences in the pricing of green and brown stocks as well as green and conventional bonds. In particular, we will dissect the carbon risk premium and analyze how firms that announce a transition from brown to green technologies contribute to the premium. Furthermore, we will analyze how different news about physical climate risks, carbon policies/transmission risk, macroeconomic risks and changes in monetary policy affect expected returns on green and conventional bonds. Finally, we will analyze how differences in the beliefs about climate risks affect climate risk premia and the welfare costs of carbon. We expect our results to have broad relevance beyond the academic research on climate finance. First, investors and financial regulators would benefit from the new insights on green asset pricing, in particular about the extent to which climate and transition risks are so far incorporated into stock markets and how much brown assets lose value in response to major climate news. Second, insights from climate finance are of high relevance for central banks on various levels, including the credibility and effectiveness of monetary policy. Third, our results will help to further our understanding of the effects of climate change on the economy, given the central role of financial markets in the economic system, and thus have implications for how public policy and our society deals with this defining challenge of our times.

• DFG Programme: Research Grants
• International Connection: Norway, Switzerland, USA
• Cooperation Partners: Professor Walter Pohl, Ph.D.; Professor Glenn Rudebusch, Ph.D.; Professor Karl Schmedders, Ph.D.
• Co-Investigators: Professor Dr. Thomas Siegmund Lontzek; Professorin Dr. Kerstin Lopatta
• Ehemaliger Antragsteller: Professor Michael D. Bauer, Ph.D., until 7/2023