TY - JOUR
T1 - Unlocking ESG Premium from Options
AU - Cao, Jie Jay
AU - Goyal, Amit
AU - Zhan, Xintong Eunice
AU - Zhang, Weiming Elaine
N1 - The authors are grateful for assiduous research assistance from Sai Ke and Ruijing Yang. We thank Kornelia Fabisik, Stephen Figlewski, Jianfeng Hu, Dmitriy Muravyev, Neil Pearson, David Sraer, Grigory Vilkov, Yichao Zhu, and seminar participants at Hong Kong Baptist University, Hong Kong Polytechnic University, Shanghai Jiaotong University, the 2022 American Finance Association Annual Conference, the 8th Melbourne Asset Pricing Meeting, the 2022 Financial Intermediation Research Society Conference, the 2022 SFS Cavalcade Asia-Pacific Conference, the 2022 WFE’s Clearing and Derivatives Conference, the 2023 Asian Bureau of Finance and Economic Research Conference, the 2023 SFS Cavalcade North America, the 2023 Alliance for Research on Corporate Sustainability Annual Conference, and the Virtual Derivatives Workshop for their helpful comments and suggestions. Cao acknowledges grants from the Research Grant Council of the Hong Kong Special Administrative Region, China [Projects GRF 14501720, 14500621, 15500023, 15500224], as well as support from The Hong Kong Polytechnic University [P0046074] and the PolyU Research Centre for Quantitative Finance [P0050344]. Zhan acknowledges grants from the National Natural Science Foundation of China [Grants 72271061 and 2022hwyq15]. Zhang gratefully acknowledges IE Business School for financial support and research facilities, and a grant by Ministerio de Ciencia, Innovación y Universidades / Agencia Estatal de Investigación / 10.13039/501100011033 / Fonds Européen de Développement Régional, Unión Europea [Grant PID2023-152707NA-I00].
Publisher Copyright:
© The Author(s), 2026.
PY - 2026/6/26
Y1 - 2026/6/26
N2 - We find that option expensiveness, measured by delta-hedged option returns, is higher for low- ESG stocks, indicating that investors pay a premium in the options market to hedge against ESG-related uncertainty. We estimate that this ESG premium is about 0.2% for 50 days. All three components of ESG contribute to option pricing. We find that investors pay the ESG premium to hedge against jump risks, but not volatility risks. The effect of ESG performance is more prominent during periods when attention to ESG is higher and for firms that are more subject to ESG-related risks.
AB - We find that option expensiveness, measured by delta-hedged option returns, is higher for low- ESG stocks, indicating that investors pay a premium in the options market to hedge against ESG-related uncertainty. We estimate that this ESG premium is about 0.2% for 50 days. All three components of ESG contribute to option pricing. We find that investors pay the ESG premium to hedge against jump risks, but not volatility risks. The effect of ESG performance is more prominent during periods when attention to ESG is higher and for firms that are more subject to ESG-related risks.
UR - https://www.scopus.com/pages/publications/105043142429
U2 - 10.1017/S0022109026103123
DO - 10.1017/S0022109026103123
M3 - Journal article
AN - SCOPUS:105043142429
SN - 0022-1090
SP - 1
EP - 42
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
ER -
SDG 13 Climate Action