Taking the wind of China's accelerated carbon neutrality transition
Qiyu Wang  1, 2@  
1 : Hong Kong Polytechnic University
2 : Zheiang Univ of Finance and Econ

This paper captures a unique phenomenon in China's carbon neutrality process, accelerating, especially after 2016. We first verify it quantitatively using the dy namic conditional correlation (DCC) model. Based on this finding, we carry out a two-step procedure. In the first step, we calculate the correlations of the carbon neutrality stocks with the main stock index. In the second step, we price the ESG funds by the selected most divergent stocks. It works very well empirically, and even in the two-factor framework. Supportive, the pricing effects increase with ESG rele vance. Lastly, we show the portfolio allocation shifts to carbon-neutrality stocks as expected. Moreover, these portfolios combined with carbon-neutrality stocks enjoy higher Sharpe ratios and lower risk.


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