Hurricane Risk and Asset Prices

54 Pages Posted: 18 Nov 2021

See all articles by Alexander Braun

Alexander Braun

Institute of Insurance Economics (University of St. Gallen)

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: October 29, 2021

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

Suggested Citation

Braun, Alexander and Braun, Julia and Weigert, Florian, Hurricane Risk and Asset Prices (October 29, 2021). 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

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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