Pricing Physical Climate Risk in the Cross-Section of Returns

60 Pages Posted: 10 Dec 2019 Last revised: 28 Oct 2022

See all articles by Glen Gostlow

Glen Gostlow

University of Zurich - Department Finance

Date Written: June 9, 2021

Abstract

Using location-specific climate exposure measures, I test for the existence of physical climate risk premia. Hurricane risk commands a positive risk premium whilst heat stress commands a negative risk premium. Both exposure to sea-level rise and exposure to extreme rainfall command no risk premium. The priced portion of physical climate risk is only between 8% - 38% of its total variance. The unpriced portion co-varies with fundamental risks in the economy, suggestive of agents struggling to price a material risk, and the unpriced portion can be explained by industry returns and the realisation of severe weather events.

Keywords: Physical Climate Risk, Risk Premia, Asset Pricing

JEL Classification: G12, G14, Q51, Q54

Suggested Citation

Gostlow, Glen, Pricing Physical Climate Risk in the Cross-Section of Returns (June 9, 2021). Available at SSRN: https://ssrn.com/abstract=3501013 or http://dx.doi.org/10.2139/ssrn.3501013

Glen Gostlow (Contact Author)

University of Zurich - Department Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

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