Abstract
ABSTRACT We construct the green factor in China based on the premium of the green concept stocks. Replacing the investment factor in the five-factor model with the green factor, we propose a new five-factor green pricing model. We find that the green risk premium is significant in China’s stock market: portfolios constructed with green stocks outperform those constructed with non-green stocks by 3.4% to 3.7% annually. Moreover, the green premium cannot be explained by other factors. Our five-factor model strongly dominates the four-factor model without the green factor and the five-factor model. For the 25 size-EP (size-ROE) portfolios, our five-factor model yields lower GRS statistics and lower average absolute alphas than the other models. Results of Fama-Macbeth regressions also support the superior performance of our five-factor model.
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