Climate Risks and Market Efficiency

42 Pages Posted: 9 May 2016 Last revised: 8 Sep 2017

See all articles by Harrison G. Hong

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business

Jiangmin Xu

Peking University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 7, 2017

Abstract

Climate science finds that the trend towards higher global temperatures exacerbates the risks of droughts. We investigate whether the prices of food stocks efficiently discount these risks. Using data from thirty-one countries with publicly-traded food companies, we rank these countries each year based on their long-term trends toward droughts using the Palmer Drought Severity Index. A poor trend ranking for a country forecasts relatively poor profit growth for food companies in that country. It also forecasts relatively poor food stock returns in that country. This return predictability is consistent with food stock prices underreacting to climate change risks.

Keywords: Climate Risks, Climate Change, Stock Market, Efficiency, Return Predictability

JEL Classification: G1, G12, G14

Suggested Citation

Hong, Harrison G. and Li, Frank Weikai and Xu, Jiangmin, Climate Risks and Market Efficiency (September 7, 2017). Journal of Econometrics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2776962 or http://dx.doi.org/10.2139/ssrn.2776962

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Jiangmin Xu

Peking University - Department of Finance ( email )

5 Yiheyuan Road
Beijing 100871
China

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