Regulatory Risk -> Carbon Premium 🔗
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I think there is a pretty big gap between Milton Friedman and the responsibility of business to the Carbon premium.
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I think you can definitely talk generally about an increase in environmental problems and concerns, and then add that investors think that that is important, hence, there might be a carbon premium.
- This also naturally asks for a clear definition of the carbon premium.
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Then you can ask about one of the possible determinants of this premium.
Methodology 🔗
- I do not think you grasped the methodology yet
Stock return is the main dependent variable which will be regressed on the main independent variable which is emission score. Emission score data is gathered from the Thomson Rheuters’ Datastream, which measures a company’s effort and effectiveness in reducing emission levels.
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So how does the election outcomes come into play?
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Your methodology seems to try to explain the cross-section of stock returns by emissions (carbon risk) and by something else (political risk) coming from the elections. But it is not testing whether the regulatory risk increases the carbon premium.
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One of the papers you refer to, Bolton and Kacperczyk (2020), do this, as far as I know:
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Estimate $$R_{it} = \alpha + \beta_t \cdot \text{Emissions}_{it} + \gamma X_{it} + \epsilon_{it}$$
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Then estimate $$\beta_t = c_0 + c \cdot F_t + \epsilon_t$$
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In this regression, you might be able to add the election variable, to see if the cross-sectional premia change as a result of changes in political ideology.
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So, you could estimate $$\beta_t = c_0 + \delta_1 \cdot \text{ElectionMargin}_t + c \cdot F_t + \epsilon_t $$