Extreme Weather Risk and the Cost of Equity
Type
conference paper
Date Issued
2023-09
Author(s)
Abstract
We examine if extreme weather exposure impacts firms’ cost of equity. Motivated by a
consumption-based asset pricing model with heterogeneous agents, we reveal the exis-
tence of an extreme weather risk premium in the cross-section of stock returns. In the
period from 1995 to 2019, domestic U.S. stocks with the most negative sensitivity to
thunderstorm losses earned excess returns of 6.5% p.a. over those with the most posi-
tive sensitivity. This premium can neither be explained by risk factors from standard
asset pricing models nor by firm characteristics. Our results reveal a novel link between
climate risk and firm value.
consumption-based asset pricing model with heterogeneous agents, we reveal the exis-
tence of an extreme weather risk premium in the cross-section of stock returns. In the
period from 1995 to 2019, domestic U.S. stocks with the most negative sensitivity to
thunderstorm losses earned excess returns of 6.5% p.a. over those with the most posi-
tive sensitivity. This premium can neither be explained by risk factors from standard
asset pricing models nor by firm characteristics. Our results reveal a novel link between
climate risk and firm value.
Language
English