Abstract
We consider the role of the green inspiration effect in explaining the cross section of returns in the Chinese stock market. After constructing a new risk factor (the green risk factor), we empirically investigate the explanatory ability of this factor for the cross section of stock returns. We find that stocks of green industries have higher average returns, and the green risk factor significantly captures excess stock returns even after controlling for firm characteristic risk factors, institutional risks and economic factors. We also highlight in a subsample analysis that the explanatory power of the green risk factor improves after June 2008.
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