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In their indisposed paper, Aswani, Raghunandan, and Rajgopal (ARR) provide a critique of our main findings on the pricing of carbon transition risk in Bolton and Kacperczyk (2021a, 2021b, 2022) and in Bolton, Halem, and Kacperczyk (2022). We take exception to the key elements of their critique. The main findings of their analysis do not contradict our findings. Rather, they corroborate some of our own findings. However, they choose to take a different interpretation from ours based on selective evidence. A large asset-pricing literature seeks to explain the cross-sectional pattern of stock returns based on exposures to aggregate risk factors such as size and book-to-market ratios or firm-specific risk linked to observable firm characteristics. In our empirical studies, we have systematically explored whether investors demand a carbon risk premium as compensation for their exposure to carbon transition risk. We have looked at how stock returns vary with CO2 emissions across firms, industries, and countries and have found consistent evidence around the world of a carbon risk premium for stock returns, and a carbon valuation discount for price–earnings and book-to-market ratios. We have further found that the carbon premium has jumped after the Paris agreement. There was no significant premium right before the Paris agreement but a highly significant and large premium after the agreement.
Bolton et al. (Thu,) studied this question.