Sea Level Rise and Portfolio Choice
70 Pages Posted: 27 Jan 2021 Last revised: 31 Jan 2022
Date Written: December 4, 2020
Many households face uninsurable background risks due to future sea level rise (SLR). Using detailed local variation in SLR exposure and disaggregated geographic information on households in the United States, I show that SLR exposed households participate less in the stock market compared to their unexposed counterparts within the same neighborhood. This effect is driven by long-run SLR risks as opposed to short-run flood risks and is elevated at times when attention to climate change is high. I provide causal evidence of the effect of SLR risks on household portfolio choices by exploiting plausibly exogenous variation stemming from the adoption of state-led climate change adaptation plans that reduced households' SLR risks. Additional tests isolate the effect of SLR exposure as a background risk from alternative explanations, including changes in house prices, past flooding experiences, endogenous location choices, political beliefs, or differences in risk preferences.
Keywords: Sea level rise, climate change, portfolio choice, stock market participation, uninsurable background risk.
JEL Classification: G11, G51, Q54
Suggested Citation: Suggested Citation