Stefano Giglio, Professor of Finance, Yale School of Management: A Quantity-Based Approach to Constructing Climate Risk Hedge Portfolios

Time: 2021-12-01 10:00 Print

Topic: A Quantity-Based Approach to Constructing Climate Risk Hedge Portfolios

Speaker: Stefano Giglio, Professor of Finance, Yale School of Management

Date: December 1, 2021 (Wednesday)

Time: 10:00am-11:30am

Location: 4-101

Language: English



We propose a new methodology to build portfolios that hedge climate change risks. Our quantity-based approach explores how mutual funds holdings change when the fund adviser experiences a local extreme heat event that shifts beliefs about climate risks. We use the observed trading behavior to predict how investors will reallocate their capital when “global” climate news shocks occur, which shift the beliefs and asset demands of many investors simultaneously and thus move equilibrium prices. We show that a portfolio that holds stocks that investors tend to buy after experiencing a local heat shock appreciates in value in periods with aggregate climate news shocks. Our quantity-based approach yields superior out-of-sample hedging performance compared to traditional methods of identifying hedge portfolios. The key advantage of the quantity-based approach is that it learns from cross-sectional trading responses rather than time-series price information, which is limited in the case of climate risks. We also demonstrate the efficacy and versatility of the quantity-based approach by constructing successful hedge portfolios for aggregate unemployment and house price risk.

About the Speaker:

Professor Giglio’s research interests span several topics, including asset pricing, macroeconomics, and real estate, with a particular focus on hedging macroeconomic risks using different financial instruments: crash risk, uncertainty risk, and climate risk.

Before joining Yale, Professor Giglio was an Associate Professor of Finance at the University of Chicago Booth School of Business. He has been awarded several prizes, including the AQR Insight Award, the Fama-DFA Prize for the Best Paper in the Journal of Financial Economics, and the UBS Global Asset Management Award for Research in Investments, and his work has been featured in several news outlets, including the Economist and the New York Times. He currently serves as an editor for the Review of Financial Studies.