Does the Carbon Premium Reflect Risk or Outperformance?

ArXiv ID: ssrn-4573622 “View on arXiv”

Authors: Unknown

Abstract

Prior research documents a carbon premium in realized returns, assuming they proxy for expected returns and thus the cost of capital. We find that the carbon pr

Keywords: Carbon Premium, Cost of Capital, Realized Returns, Expected Returns, Sustainable Finance, Equities

Complexity vs Empirical Score

• Math Complexity: 3.0/10
• Empirical Rigor: 8.0/10
• Quadrant: Street Traders
• Why: The paper uses advanced econometric models and robust statistical methods (e.g., Hou, van Dijk, and Zhang (2012) earnings forecasts, multi-factor models for announcement returns) to analyze large-scale financial and earnings data, but the mathematics is primarily applied statistics rather than dense theoretical derivations.

  flowchart TD
    A["Research Goal:<br>Does Carbon Premium<br>Reflect Risk or Outperformance?"] --> B["Key Methodology<br>Asset Pricing Tests<br>Control Portfolio Approach"]
    B --> C["Data & Inputs"]
    C --> D["Computational Processes"]
    D --> E["Key Findings / Outcomes"]
    
    C --> C1["Firm-Level Carbon Emissions<br>Financial & Market Data<br>Portfolio Sorts"]
    C1 --> D
    
    D --> D1["Time-Series Regressions<br>Beta Estimation<br>Alpha Calculation"]
    D1 --> E
    
    E --> E1["Carbon Premium <strong>does not</strong><br>proxy for Cost of Capital"]
    E --> E2["Premium reflects<br><strong>Outperformance</strong> (Alpha)<br>not Risk Exposure"]
    E --> E3["Separates Expected vs.<br>Realized Returns"]