Description

Whether high-carbon (HC) or low-carbon (LC) firms earn higher or lower returns remains a central debate in the carbon risk pricing literature, referred to as the "carbon premium puzzle''. This issue also attracts growing attention from investors. To address this, we develop a Carbon Risk Dynamic Indicator (CARDI) based on a Quantile-LASSO network framework. By integrating asset pricing theory with the econometric properties of CARDI—particularly its implications for rising volatility—we show that the LC premium arises from a shift in investor demand from high-carbon (HC) to low-carbon (LC) firms, which can be predicted by a rising CARDI. We refer to this mechanism as the "volatility–demand shift–LC premium'' channel. Empirically, we examine CARDI’s predictive power for future LC premiums and its transmission through volatility channels, using panel data from Chinese listed firms.