Climate Sensitivity and Predictable Returns

39 Pages Posted: 26 Feb 2019

See all articles by Alok Kumar

Alok Kumar

University of Miami - School of Business Administration

Wei Xin

University of Warwick, Warwick Business School, Students

Chendi Zhang

University of Warwick - Finance Group

Date Written: February 10, 2019

Abstract

The paper finds that firms' exposure to temperature changes predicts stock returns. We use the sensitivity of stock returns to abnormal temperature changes to measure firm-level climate sensitivity. Stocks with higher climate sensitivity forecast lower stock returns. A trading strategy that exploits the return predictability generates risk-adjusted returns of 3.6% per year from 1931 to 2017. Further, climate sensitivity also predicts lower firm profits. Our results are robust to controlling for macroeconomics conditions and asymmetric return sensitivity to temperature changes. Overall, these findings are consistent with stock markets underreacting to firms' climate sensitivity.

Keywords: climate change, climate risk, market efficiency, return predictability

JEL Classification: G14, G40

Suggested Citation

Kumar, Alok and Xin, Wei and Zhang, Chendi, Climate Sensitivity and Predictable Returns (February 10, 2019). Available at SSRN: https://ssrn.com/abstract=3331872 or http://dx.doi.org/10.2139/ssrn.3331872

Alok Kumar

University of Miami - School of Business Administration ( email )

514 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, Students ( email )

West Midlands, CV4 7AL
United Kingdom

Chendi Zhang (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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