Yale SOM Finance Faculty Focus on Climate Finance
The Review of Financial Studies has recently issued a very special edition of the publication with a focus on climate finance (Volume 33, Issue 3, March 2020). The journal cites that this is a direct result of an initiative by the RFS to develop research proposals on climate finance.
Several current and former Yale SOM finance faculty members had the honor of having their important climate finance focused papers selected for this March 2020 issue of the journal. Read more about the two papers below:
“Is the Risk of Sea Level Rise Capitalized in Residential Real Estate?” by Justin Murfin and Matthew Spiegel
Using a comprehensive database of coastal home sales merged with data on elevation relative to local tides, we compare prices for houses based on their inundation threshold under projections of sea level rise. The analysis separates the sensitivity of housing to rising seas from other confounding characteristics by exploiting cross-sectional differences in relative sea level rise due to vertical land motion. This provides variation in the expected time to inundation for properties of similar elevation and distance from the coast. In a variety of specifications and test settings, we find precisely estimated null results suggesting limited price effects.
“Hedging Climate Change News,” by Robert F Engle, Stefano Giglio, Bryan Kelly, Heebum Lee, and Johannes Stroebel
We propose and implement a procedure to dynamically hedge climate change risk. We extract innovations from climate news series that we construct through textual analysis of newspapers. We then use a mimicking portfolio approach 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. We discuss multiple directions for future research on financial approaches to managing climate risk.