Understanding Macro and Asset Price Dynamics During the Climate Transition

Bank of Lithuania Discussion Paper No. 18/2019

67 Pages Posted: 22 Mar 2021

See all articles by Michael Donadelli

Michael Donadelli

University of Brescia

Patrick Grüning

Vilnius University - Faculty of Economics and Business Administration

Steffen Hitzemann

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: December 7, 2020

Abstract

This paper analyzes the transition to a low-carbon economy and its effects on macroeconomic quantities and asset prices. Empirically, we document that the relative valuation of fossil fuel firms has significantly declined with the rise of climate change risk awareness. We develop a macro asset pricing model for the climate transition that matches this empirical fact and allows us to characterize the dynamics of macroeconomic aggregates and asset prices during and after the transition. In particular, we analyze (i) firm valuation dynamics, (ii) climate policy risk premia, (iii) capital reallocation between sectors, and (iv) the behavior of oil prices.

Keywords: Climate change, Policy risk, General equilibrium, Risk premia, Oil market

JEL Classification: E2, E3, G12, Q43

Suggested Citation

Donadelli, Michael and Grüning, Patrick and Hitzemann, Steffen, Understanding Macro and Asset Price Dynamics During the Climate Transition (December 7, 2020). Bank of Lithuania Discussion Paper No. 18/2019, Available at SSRN: https://ssrn.com/abstract=3801562 or http://dx.doi.org/10.2139/ssrn.3801562

Michael Donadelli

University of Brescia ( email )

Piazza del Mercato, 15
25122 Brescia
Italy

Patrick Grüning (Contact Author)

Vilnius University - Faculty of Economics and Business Administration ( email )

Sauletekio al. 9 (II building)
Vilnius, LT-10222
Lithuania

HOME PAGE: http://www.evaf.vu.lt/en/

Steffen Hitzemann

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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