Climate Change Exposure and Stock Return Predictability

51 Pages Posted: 4 Feb 2021

See all articles by Jiangmin Xu

Jiangmin Xu

Peking University - Guanghua School of Management

Cheng Sun

Peking University

Yihui You

Peking University - Guanghua School of Management

Date Written: January 31, 2021

Abstract

This paper finds evidence that stock returns vary with the climate change exposure of firms in a predictable manner. Using the Palmer Drought Severity Index, we construct firm-level climate change exposure and find that firms with high climate change exposure experience lower future profitability. We show that stock prices do not promptly incorporate such climate change information, and these firms with high climate change exposures are subject to subsequent lower stock returns. A long-short trading strategy based on this effect produces significant alphas of around 0.7% per month. Additionally, we find this return predictability is more pronounced under acute climate change conditions, and is robust to industry or macroeconomic factors.

Keywords: Climate Change, Investor Attention, Return Predictability

JEL Classification: G10, G11, G12

Suggested Citation

Xu, Jiangmin and Sun, Cheng and You, Yihui, Climate Change Exposure and Stock Return Predictability (January 31, 2021). Available at SSRN: https://ssrn.com/abstract=3777060 or http://dx.doi.org/10.2139/ssrn.3777060

Jiangmin Xu (Contact Author)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Cheng Sun

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Yihui You

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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