Extreme Weather Risk and the Cross-Section of Stock Returns

Abstract

We provide evidence for an extreme weather risk premium in the cross-section of stock returns. In the period from 1995 to 2019, domestic U.S. stocks with the most negative sensitivity to economy-wide storm losses earned excess returns of 6.5% p.a. over stocks with the most positive sensitivity. This premium can neither be explained by asset pricing risk factors nor by firm characteristics. It prevails for geographically exposed as well as historically affected firms from a broad range of industries. Our results reveal a novel link between climate risk and firm value.

Keywords: Extreme Weather Risk, Empirical Asset Pricing, Cross-Section of Stock Returns, Climate Risk

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