A master thesis from Aalborg University
Pricing Transition Risk in European Stock Returns
Author(s)
Term
4. semester
Publication year
2025
Submitted on
2025-06-03
Pages
46 pages
Abstract
This thesis investigates the pricing of carbon transition risk in European stock returns from 2015 to 2024. We examine whether firm-level carbon exposure, measured by industry-adjusted emissions levels, intensity, growth, and carbon beta (sensitivity to EUA carbon price changes), exhibits a statistically and economically significant relationship with subsequent equity excess returns. Employing quintile portfolio sorts, Fama-French factor models, Fama-MacBeth cross-sectional regressions, and panel fixed-effects models, our unconditional analyses provide limited evidence for a direct carbon risk premium or greenium associated with these metrics. However, a key finding emerges from conditional Fama-MacBeth regressions: the relationship between stock returns and both industry-adjusted emission levels and intensity becomes significantly more positive during periods of rising EUA carbon prices, suggesting state-dependent pricing. This conditional effect, though statistically robust, appears economically modest. Estimated carbon beta was not found to be a distinctly priced risk factor in multivariate settings. Overall, our results indicate that while a simple, unconditional carbon premium is elusive in the recent European market, transition risk pricing is apparent through its interaction with carbon market dynamics
Keywords
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