Extreme Weather Risk and the Cost of Equity

Posted: 18 Nov 2021 Last revised: 3 Feb 2023

See all articles by Alexander Braun

Alexander Braun

Institute of Insurance Economics (University of St. Gallen); Swiss Finance Institute

Julia Braun

Institute of Insurance Economics (University of St. Gallen)

Florian Weigert

University of Neuchatel - Institute of Financial Analysis; University of Cologne - Centre for Financial Research (CFR)

Date Written: February 3, 2023

Abstract

We examine if extreme weather exposure impacts the cost of equity of U.S. firms. Motivated by a consumption-based asset pricing model with heterogeneous agents, we derive two conditions for a meteorological risk premium in the cross-section of stock returns that can be tested em- pirically. We find that – since the mid 1990s – stocks of domestic firms that reacted negatively to severe storm losses outperformed stocks that reacted positively by at least 6.5% p.a. This risk premium can neither be explained by standard asset pricing factors nor firm characteristics. Our results reveal how climate risk may be linked to firm value.

Keywords: Extreme Weather Risk, Climate Risk, Cost of Equity, Empirical Asset Pricing

JEL Classification: C12, G01, G11, G12, G17

Suggested Citation

Braun, Alexander and Braun, Julia and Weigert, Florian, Extreme Weather Risk and the Cost of Equity (February 3, 2023). Available at SSRN: https://ssrn.com/abstract=3952620 or http://dx.doi.org/10.2139/ssrn.3952620

Alexander Braun (Contact Author)

Institute of Insurance Economics (University of St. Gallen) ( email )

Tannenstrasse 19
St. Gallen, 9000
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

HOME PAGE: http://https://www.alexandria.unisg.ch/persons/2621

Julia Braun

Institute of Insurance Economics (University of St. Gallen)

Tannenstrasse 19
St. Gallen, St. Gallen 9000
Switzerland

Florian Weigert

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel,7
Neuchatel, CH-2000
Switzerland

University of Cologne - Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

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