Unlocking ESG Premium from Options

Office of Alumni and External Relations    2021-09-11

Subject: Unlocking ESG Premium from Options

Guest: Jie Cao, Associate Professor, The Chinese University of Hong Kong

Host: Zhang Ran, Assistant Professor, Antai

Time: Wednesday, Sep 15, 2021,  10:00-11:30

Venue: Tecent Meeting (Please send email to for meeting number and password by 17:00, Sep 14)


We find that option expensiveness, as measured by implied volatility, is higher for low-ESG stocks, showing that investors pay a premium in the option market to hedge ESG-related uncertainty. Using delta-hedged option returns, we estimate this ESG premium to be about 0.3% per month. All three components of ESG contribute to option pricing. The effect of ESG performance heightens after the announcement of Paris Agreement, after speeches of Greta Thunberg, and in the aftermath of Me-Too movement. We find that investors pay ESG premium to hedge volatility, jump, and other higher moment risks. The influence of ESG on option premia is stronger for firms that are closer to end-consumers, facing severer product competition, with higher investors’ ESG awareness, and without corporate hedging activity.

Prof. Jie (Jay) Cao is an Associate Professor in Department of Finance, The Chinese University of Hong Kong (CUHK) Business School. He received his PhD in Finance from University of Texas at Austin in 2009 and BA in Economics from Peking University in 2002. His research areas are empirical asset pricing, derivatives, and behavioural finance. His research specifically focuses on the return predictability and quantitative trading strategies using stocks and stock options. His papers are published or forthcoming in Journal of Financial Economics, Review of Financial Studies, Journal of Financial and Quantitative Analysis, and Management Science. His works has been presented in major finance conferences such as American Finance Association annual meeting, Western Finance Association annual meeting, European Finance Association annual meeting, and The Financial Intermediation Research Society Conference, and conferences held by institutions such as Federal Deposit Insurance Corporation (FDIC), Deutsche Bank, and Macquarie Group. He has also been invited by industry professionals for presentation such as Morgan Stanley, Two Sigma, Cubist Systematic Strategies, and Yinghua Fund Management. His papers have received many awards. He is the Principal Investigator of several Hong Kong competitive RGC grants and many other research grants from both academic and industry sponsors such as The Canadian Derivatives Institute (CDI). 

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