Hurricane Risk and Asset Prices

Abstract

We examine hurricane exposure as a systematic risk factor in the US stock market. Motivated by a consumption-based asset pricing model with heterogeneous agents, we derive a necessary and sufficient condition for a hurricane risk premium in the cross-section of stock returns. Empirically, we find that -- in the period from 1995 to 2020 -- stocks with a low sensitivity to aggregate hurricane losses outperform stocks with a high sensitivity by 8.9% per annum. The hurricane premium is not explained by standard asset pricing risk factors nor stock characteristics. Our results emphasize the importance of climate risk for firms’ cost of capital.

Keywords: Hurricane Risk, Consumption-Based Asset Pricing with Heterogeneous Agents, Empirical Asset Pricing, Climate Change

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