Publisher:
Bocconi University, Centre for Research on Geography, Resources, Environment, Energy and Networks (GREEN), Milan
Abstract:
Climate change, trade wars, supply-chain disruptions, and geopolitical uncertainty - one may characterize the post-COVID era as such. The Circular Economy, with its focus on a circular production process, is a framework that addresses exactly these drivers of heightened uncertainty. We propose the circularity factor (CF), a hedging portfolio constructed by buying stocks with a high circularity score (CS) and shorting stocks with a low CS. Controlling for firm-size, we find this to be a profitable strategy in the European, but not in the U.S. market, for now. Furthermore, the dynamics of CF are not to be explained by prominent factor models, and CF stands out against the plethora of members of the "factor zoo" to price the cross-section of European stock returns.
