Temperature Volatility Risk

53 Pages Posted: 14 Feb 2019 Last revised: 5 Mar 2019

See all articles by Michael Donadelli

Michael Donadelli

Leibniz Institute for Financial Research SAFE

Marcus Jüppner

Leibniz Institute for Financial Research SAFE; Deutsche Bundesbank

Antonio Paradiso

Ca Foscari University of Venice - Dipartimento di Economia

Christian Schlag

Goethe University Frankfurt; Leibniz Institute for Financial Research SAFE

Date Written: February 13, 2019

Abstract

We produce novel empirical evidence on the relevance of temperature volatility shocks for the dynamics of macro aggregates and asset prices. Using two centuries of UK temperature data, we document that the relationship between temperature volatility and the macroeconomy varies over time. First, the sign of the causality from temperature volatility to TFP growth is negative in the post-war period (i.e., 1950-2015) and positive before (i.e., 1800-1950). Second, over the pre-1950 (post-1950) period temperature volatility shocks positively (negatively) affect TFP growth. In the post-1950 period, temperature volatility shocks are also found to undermine equity valuations and other main macro aggregates. More importantly, temperature volatility shocks are priced in the cross section of returns and command a positive premium. We rationalize these findings within a production economy featuring long-run productivity and temperature volatility risk. In the model temperature volatility shocks generate non-negligible welfare costs. Such costs decrease (increase) when associated with immediate technology adaptation (capital depreciation).

Keywords: temperature volatility, TFP, asset prices, and welfare costs

JEL Classification: E30, G12, Q0

Suggested Citation

Donadelli, Michael and Jüppner, Marcus and Paradiso, Antonio and Schlag, Christian, Temperature Volatility Risk (February 13, 2019). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. No. 05/WP/2019 , Available at SSRN: https://ssrn.com/abstract=3333915 or http://dx.doi.org/10.2139/ssrn.3333915

Michael Donadelli (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Marcus Jüppner

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

Antonio Paradiso

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Christian Schlag

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

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