Is the Korean green premium in equilibrium?

Abstract

This study examines the Green premium in the Korean stock market using the two -factor equilibrium model developed by P ' astor, Stambaugh, and Taylor (2021), which consists of the Market and Green factors. From 2012 to 2020, the Green factor premium in the Korean stock market is estimated to be negative, with a monthly average of -0.23%. This finding aligns with the expectations of the equilibrium model, which suggests a negative Green premium (indicating low Green and high Brown) due to the investors' preference for green investments and the demand for hedging against climate risk. The negative sign of the Green factor premium holds robustly across different methods and data employed in the analyses. However, there has been a recent weakening in the magnitude of the negative Green factor premium. This suggests a potential impact of positive ESG shocks on the Korean stock market, similar to the case observed in the US stock market, where a positive realized Green premium was identified by P ' astor, Stambaugh, and Taylor (2022).