Do Fund Managers Misestimate Climatic Disaster Risk?

Review of Financial Studies, Forthcoming

Indian School of Business

64 Pages Posted: 2 Aug 2019 Last revised: 21 Apr 2020

See all articles by Shashwat Alok

Shashwat Alok

Indian School of Business (ISB), Hyderabad

Nitin Kumar

Indian School of Business (ISB), Hyderabad

Russ Wermers

University of Maryland - Robert H. Smith School of Business; European Corporate Governance Institute (ECGI)

Date Written: July 22, 2019

Abstract

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

Alok, Shashwat and Kumar, Nitin and Wermers, Russell R., Do Fund Managers Misestimate Climatic Disaster Risk? (July 22, 2019). Review of Financial Studies, Forthcoming, Indian School of Business, Available at SSRN: https://ssrn.com/abstract=3427903 or http://dx.doi.org/10.2139/ssrn.3427903

Shashwat Alok (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India
914023187188 (Phone)

Nitin Kumar

Indian School of Business (ISB), Hyderabad ( email )

India

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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