Does extreme climate concern drive equity premiums? Evidence from China

We construct an extreme climate concern indicator (ECC) on the basis of the coverage of the extreme climate news reports. First, ECC significantly negatively forecasts stock market returns in subsequent months. The predictability of ECC returns outperforms alternative confidence indicators and economic predictors over both in-sample and out-of-sample periods. Second, relative to before the Paris Agreement entered into force, extreme climate concerns prominently enhanced the forecasting capabilities after the signing of the Paris Agreement. Third, the return prediction accuracy of ECC in periods of low climate concern is significantly greater than that in periods of high climate concern, which is also consistent with the limited attention of investors. Finally, ECC substantially brings appreciable economic gains to investors, and the relevant empirical results pass a series of robustness tests.