When transition narratives move markets: Green premium dynamics in China

This paper examines how macro-level climate-transition narratives are transmitted into asset prices. We define these narratives as directional, market-wide explanations in news articles that translate transition-related developments into expectations about green and brown sectors. The theoretical framework distinguishes information-based repricing from behavioral trading, which differ in their return dynamics, trading activity, and investor attention. To measure this construct, we develop an Aggregate Climate-Transition Narrative Score (ACTS), a high-frequency index based on a large language model that uses contextual classification to capture both the direction and intensity of climate-related news. Using China’s stock market as an empirical setting, we link ACTS to a policy-anchored green-minus-brown (GMB) return spread. ACTS predicts higher GMB returns at daily and monthly horizons, with partial monthly reversal and higher turnover in green stocks and retail investor attention. Our evidence suggests that these narratives operate as tradable themes that amplify sentiment and retail attention.