What drives green betas? Climate uncertainty or speculation

Abstract

Examining green equity sectors including geothermal, wind, solar, bioclean, and clean energy within a DCC-MIDAS framework, we show that green betas are predominantly driven by speculative sentiment in technology stocks rather than climate uncertainty. We argue that the lottery-like features of green assets, whose values are highly tied to the success of new technologies, result in a negative risk-mispricing relationship driven by technology speculation. Further economic analysis shows that a forward-looking investment strategy conditional on technology sentiment yields improved risk-adjusted returns for passive equity investors, par-ticularly following the 2016 Paris Agreement. Our findings establish a new speculation-based channel for characterizing the systematic risk of green assets.