Has the green factor been priced by the market? Empirical research based on the A-share market

Abstract On the basis of reviewing relevant literature research, this paper uses the LDA clustering model to conduct a clustering analysis on the news corpus of China’s A-share market. Three environmental risk factors, namely “climate”, “carbon emissions”, and “ecology”, are extracted and their impact on stock excess returns is empirically tested. The results showed that environmental risk factors could better explain the returns of long-short portfolios based on environmental ratings, while traditional Fama–French five-factors and momentum factors could not explain this portfolio return. This paper further proposes a weighted investment portfolio strategy based on environmental risk factors. Compared with the equally weighted portfolio, the long-short portfolio constructed using this strategy demonstrates a stronger upward trend and lower volatility during the sample period from 2009 to 2024, effectively avoiding the impact of the 2015 A-share market crash. At the individual stock level, the Fama–MacBeth regression results showed that all three environmental risk factors had significant predictive power for future returns.