Shelter from the Storm: Which Safe Asset for Climate Disasters?

94 Pages Posted: 19 Feb 2020

See all articles by Matthew Lanfear

Matthew Lanfear

EDHEC Business School

Abraham Lioui

EDHEC Business School and Scientific Beta Research Chair

Mark Siebert

EDHEC Business School

Date Written: January 23, 2020

Abstract

Hurricanes give rise to flight-to-safety episodes during which equity market realized volatility increases and stock prices are depressed. Using an event study, we show that High Tech stocks consistently behave differently from stocks in other indus- tries. Converting their abnormal, risk-adjusted, returns into a certainty equivalent, we show that it is systematically greater than the short-term bond return. High Tech stocks’ prices include a safety premium of at least 3.75% annualized and peaks at 16% annualized for periods of up to 20 days after hurricanes made landfall. This safe asset feature and the safety premium attached to it has strengthened in the period since the 2008 Global Financial Crisis. The flight-to-safety is not associated with a flight-to-liquidity episode, nor with changing risk aversion, but is a flight-to- quality. The robust findings confirm that risky assets (High Tech stocks) can act as safe assets during periods of market distress caused by extreme weather events.

Keywords: Climate change, climate finance, event study, extreme weather events, flight-to-safety, flight-to-quality, hurricanes, safe assets, safety premium

JEL Classification: G14, G17, Q54

Suggested Citation

Lanfear, Matthew and Lioui, Abraham and Siebert, Mark, Shelter from the Storm: Which Safe Asset for Climate Disasters? (January 23, 2020). Available at SSRN: https://ssrn.com/abstract=3511079 or http://dx.doi.org/10.2139/ssrn.3511079

Matthew Lanfear (Contact Author)

EDHEC Business School ( email )

France

Abraham Lioui

EDHEC Business School and Scientific Beta Research Chair ( email )

France

Mark Siebert

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

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