Is climate risk perception a pricing factor in China's stock market?

Key Points

• This research aims to examine whether climate risk perception affects stock market prices in China.
• Analyzed annual reports of Chinese A-share companies from 2010 to 2023 using text analysis.
• Constructed a climate risk perception factor and incorporated it into a Fama-French five-factor model to create a six-factor model.
• Employed Fama-MacBeth regression to test the systematic risk properties of the model.
• Climate risk perception significantly increases stock return risk premiums, with high-risk exposure portfolios yielding higher excess returns.
• Redundancy and GRS tests confirm that the climate risk factor cannot be explained by traditional five-factor models, enhancing the explanation of cross-sectional differences in stock returns.
• Cross-sectional regression verifies that climate risk perception is an undiversifiable systematic risk, meeting core pricing factor conditions.

Abstract