Associate Professor Fang Tong from the School of Economics Publishes Research in International Authoritative Finance Journal Journal of Futures Markets

Recently, the collaborative paper Hedging climate change news with commodity futures: An index-tracking approach by Associate Professor Fang Tong from the School of Economics at Shandong University and Professor Yin Libo from the School of Finance at Central University of Finance and Economics was officially published in Journal of Futures Markets, an international authoritative finance journal.

Climate change has become a major challenge facing the economic and social development of mankind and has a profound impact on financial markets. Investors' demand for hedging and avoiding climate risks is constantly rising. Existing studies mostly discuss the important role of weather derivatives and green assets in hedging climate risks, and some studies attempt to hedge climate risks with stocks, but there are still many deficiencies in asset and model selection.

From the perspective of commodity futures, this paper constructs a futures portfolio hedging the climate news index with an index-tracking model, evaluates the out-of-sample hedging and tracking effects of the portfolio, and further discusses the model properties when considering short-selling constraints. The study finds that the commodity futures portfolio constructed with the index-tracking model achieves a good tracking effect of the out-of-sample climate news index. Imposing short-selling constraints in the model will significantly enhance hedging ability, mainly because short-selling constraints produce a variable selection effect, alleviate the "overfitting" problem through sparsification, and thus bring better out-of-sample index tracking ability.

The innovation of this paper is mainly reflected in two aspects: first, proposing an analytical framework for constructing climate risk hedging investment portfolios and discussing the corresponding model properties; second, empirically exploring the possibility and advantages of using commodity futures to hedge climate risks. This paper has certain practical value for investors to cope with climate risks.

Fang Tong is an associate professor at the School of Economics at Shandong University. His research directions are climate finance and green finance. He has published more than 20 papers in journals such as The Journal of Quantitative & Technical Economics, Management Review, Journal of Empirical Finance, Journal of Futures Markets, and International Review of Finance, and presided over projects of the National Natural Science Foundation of China and the Natural Science Foundation of Shandong Province.