Physical Climate Change Exposure and Stock Returns

49 Pages Posted: 4 Feb 2021 Last revised: 18 Mar 2022

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: March 18, 2022

Abstract

This paper finds evidence that stock returns vary with the physical climate change exposure of firms in a predictable manner. We show that investors do not efficiently incorporate the salient information on firms' physical climate change exposures, and firms with high exposures are subject to subsequent lower stock returns. A long-short trading strategy based on the ranking of the exposure produces significant factor-adjusted alphas of around 0.5% per month. We also show that our results cannot be driven by alternative explanations based on hedging against climate change risks, pricing of carbon risks, or concerns for ESG risks. Additionally, we document that the increased public awareness of climate change in recent times has reduced the strength of the predictability relation.

Keywords: Climate Risks, Physical Climate Change, Stock Return, Market Efficiency, Investor Attention

JEL Classification: G1, G12, G14, Q51, Q54

Suggested Citation

Xu, Jiangmin and Sun, Cheng and You, Yihui, Physical Climate Change Exposure and Stock Returns (March 18, 2022). 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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