Hurricane Risk and Asset Prices

We examine hurricane exposure as a systematic risk factor in the US stock market. Motivated by
a consumption-based asset pricing model with heterogeneous agents, we derive a necessary and
sufficient condition for a hurricane risk premium in the cross-section of stock returns. Empirically,
we find that – in the period from 1995 to 2020 – stocks that react negatively to aggregate
hurricane losses outperform stocks that react positively by almost 9% p.a. The hurricane premium
is not explained by standard asset pricing risk factors nor stock characteristics. Our
results emphasize the importance of climate risk for firms’ cost of capital.