Climate transition risk premium in equity markets: Downside asymmetry and regime dependence across Europe, the United States, and the United Kingdom

This paper examines the pricing of climate transition risk in equity markets through the return differential between clean energy and brown indices across Europe, the United States, and the United Kingdom. Using daily data, the analysis combines OLS regressions, factor-based specifications, rolling-window estimates, downside beta analysis, quantile regressions, tail-risk measures, and event-based tests, complemented by a green bond robustness check. The results show that the transition-related equity premium is not a stable unconditional spread, but rather a conditional and time-varying phenomenon. Its magnitude varies across regions, responds to market, energy, and carbon-pricing conditions, and becomes more pronounced during periods of stress and in the tails of the return distribution. The factor-based analysis identifies industrial and real-economy conditions as the most robust additional set of determinants, while financial stress plays a more episodic role. Downside beta and quantile evidence reveal substantial asymmetry in the behavior of the clean-minus-brown spread, with the United Kingdom exhibiting the strongest tail sensitivity. Overall, the findings indicate that transition risk is reflected in equity prices, but in an asymmetric, state-dependent, and heterogeneous manner across markets.