Do Fund Managers Misestimate Climatic Disaster Risk?
Review of Financial Studies, Forthcoming
64 Pages Posted: 2 Aug 2019 Last revised: 21 Apr 2020
Date Written: July 22, 2019
We examine whether professional money managers overreact to large climatic disasters. We find that managers within a major disaster region underweight disaster zone stocks to a much greater degree than distant managers and that this aversion to disaster zone stocks is related to a salience bias that decreases over time and distance from the disaster, rather than to superior information possessed by close managers. This overreaction can be costly to fund investors for some especially salient disasters like hurricanes and tornadoes: a long-short strategy that exploits the overreaction generates a significant DGTW-adjusted return over the following 2 years.
Keywords: Climate finance, climate risks, mutual funds
JEL Classification: G10, G11, G23, G40, G41
Suggested Citation: Suggested Citation