Sea Level Rise and Portfolio Choice
56 Pages Posted: 27 Jan 2021 Last revised: 4 Feb 2021
Date Written: December 4, 2020
Economic theory suggests that the presence of undiversifiable background risks influences household portfolio choices. Households face significant location-specific background risks due to 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 homeowners are less likely to participate in the stock market and invest a smaller share of their financial wealth in risky assets, compared to unexposed homeowners in the same neighborhood. Differences in risk preferences and endogenous location choices are unable to explain this effect. Using plausibly exogenous variation stemming from the adoption of state-level climate change adaptation plans that reduced households' SLR risks, I provide causal evidence of the effect of SLR risks on portfolio allocation decisions. Following the adoption of such climate adaptation plans, SLR exposed households increase their stock market participation and hold a larger risky share in their financial wealth.
Keywords: Sea level rise, climate change, background risk, portfolio choice, stock market participation
JEL Classification: G11, G50, Q54
Suggested Citation: Suggested Citation