Biao Yang

Biao Yang

Assistant Professor in Finance, Shanghai Jiao Tong University

Working Papers

Explaining Greenium in a Macro-Finance Integrated Assessment Model

My job market paper explains the green stock return patterns in a production-based asset pricing model. SSRN link here

Abstract How do firms’ environmental performances affect cross-sectional expected stock returns? Using a third-party ESG score, I find that greener stocks have lower expected returns. This greenium remains significant after controlling for systematic and idiosyncratic risks. Green stocks hedge climate-related disasters, contributing to the greenium. A macro-finance integrated assessment model featuring time-varying climate damage intensity, recursive preferences, and investment frictions quantitatively explains the empirical findings. The model implies a positive covariance between climate damages and consumption, which justifies a high discount rate and a low present value of carbon emission.

International Climate News

Co-authored with Mariano Massimiliano Croce (Bocconi), Riccardo Colacito (UNC), and Maria Jose Arteaga-Garavito (Bocconi). SSRN link here

Abstract We construct a dataset with novel high-frequency climate attention indices for a broad cross section of both advanced and emerging economies. We do so by applying text analysis methods to news published by major national newspapers on Twitter over the sample 2014 to 2022. In order to form hypotheses on the response of both international investment flows and currencies to global and local climate attention news, we consider a model in which: (i) investors price climate news shocks; (ii) investment goods can be used to increase green or brown assets; and (iii) there are both local and global climate attention shocks. Our model predicts that a country subject to a relatively more adverse climate news shock should experience both a decline in its net exports and an appreciation of its currency. Our novel data cofirm these predictions.

Uncertainty and Market Efficiency: An Information Choice Perspective

Co-authored with Harrison Ham (Clemson University), Zhongjin Lu (University of Georgia), Wang Renxuan (CEIBS), and Katherine Wood (Bentley University).

Abstract We develop an information choice model where information costs are sticky and co-move with firm-level intrinsic uncertainty as opposed to temporal variations in uncertainty. Incorporating analysts’ forecasts, we predict a negative relationship between information costs and information acquisition, as proxied by the predictability of analysts’ forecast biases. Finally, the model shows a contrasting pattern between information acquisition and intrinsic and temporal uncertainty, where intrinsic uncertainty strengthens return predictability of analysts’ biases through the information cost channel, while temporal uncertainty weakens it through the information benefit channel. We empirically confirm these opposing relationships that existing theories struggle to explain.

Green Investing, Information Asymmetry, and Capital Structure

Co-authored with Shasha Li (IWH, Germany). SSRN link here

Abstract We investigate how optimal attention allocation of green-motivated investors changes information asymmetry in financial markets and thus affects firms’ financing costs. To guide our empirical analysis, we propose a model where investors with heterogeneous green preferences endogenously allocate limited attention to learn market-level or firm-specific fundamental shocks. We find that a higher fraction of green investors in the market leads to higher aggregate attention to green firms. This reduces the information asymmetry of green firms, leading to higher price informativeness and lower leverage. Moreover, the information asymmetry of brown firms and the market increases with the share of green investors. Therefore, greater green attention is associated with less market efficiency. We provide empirical evidence to support our model predictions using U.S. data. Our paper shows how the growing demand for sustainable investing shifts investors’ attention and benefits eco-friendly firms.

Generalized Black-Scholes Option Pricing and Investor Sentiment

Co-authored with Kwangwon Ahn (Yonsei, South Korea) and Changyong Ha (PHBS, China).

Abstract This paper extends the standard Black-Scholes (BS) option pricing framework by utilizing the generalized solution to the heat equation proposed by Choi et al. (2017). We present the closed-form solution for a generalized BS (GBS) model and show that the modification to the standard call option price comes from two additional augments interpreted as factors associated with investor sentiment toward the underlying asset. Our model outperforms the standard BS model in both in-sample fit and out-of-sample prediction on S&P 500 index option data. Further analysis shows that the parameters for the newly incorporated terms strongly reflect investors expectation and help better explain how option market prices tend to drift from the BS model.

The Spillover of Corporate ES on Cost of Debt

Co-authored with Danmo Lin (Warwick Business School, UK) and Siti Farida (Birmingham Business School, UK). SSRN link here

Abstract We examine how corporate environmental and social (ES) risks influence the bank loan costs of peer firms. Utilizing a regression discontinuity approach based on shareholder votes on ES-related proposals in U.S. public companies from 2005 to 2021, we find that the approval of these proposals leads to an average 38 basis-point increase in peer firms’ loan costs over the following year. This effect is more pronounced when the proposal is more salient for banks, and when peers have higher ex-ante ES risk and weaker bargaining power. Surprisingly, we find that the spillover is primarily driven by banks with less expertise or weaker ex-ante incentives to price ES risks. These findings suggest that corporate ES risks extend beyond individual firms and influence the loan costs of broader peer borrowers by shaping banks’ loan pricing practices.