Climate Sensitivity, Mispricing, and Predictable Returns

74 Pages Posted: 26 Feb 2019 Last revised: 28 Nov 2022

See all articles by Carina Cuculiza

Carina Cuculiza

Marquette University

Alok Kumar

University of Miami - Miami Herbert Business School

Wei Xin

University of Warwick, Warwick Business School

Chendi Zhang

University of Exeter Business School

Date Written: November 26, 2022

Abstract

We examine the relation between climate change and firm performance. Using a novel measure of firm-level temperature sensitivity, we show that stocks with higher temperature sensitivity are overpriced. They have lower future profitability, riskier corporate policies, and lower future returns. Both institutional investors and sell-side equity analysts contribute to the mispricing. Collectively, these results suggest that financial markets under-react to firm-specific information about climate change, which generates predictable patterns in returns. During the 1968-2020 sample period, a trading strategy that exploits this information generates an annualized risk-adjusted return of over 4%.

Keywords: Climate sensitivity, return predictability, mispricing, market under-reaction, institutional investors, sell-side analysts.

JEL Classification: G12, G14

Suggested Citation

Cuculiza, Carina and Kumar, Alok and Xin, Wei and Zhang, Chendi, Climate Sensitivity, Mispricing, and Predictable Returns (November 26, 2022). Available at SSRN: https://ssrn.com/abstract=3331872 or http://dx.doi.org/10.2139/ssrn.3331872

Carina Cuculiza

Marquette University ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

Alok Kumar (Contact Author)

University of Miami - Miami Herbert Business School ( email )

517B Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Wei Xin

University of Warwick, Warwick Business School ( email )

West Midlands, CV4 7AL
United Kingdom

Chendi Zhang

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,487
Abstract Views
4,838
Rank
19,331
PlumX Metrics