Extreme Weather Risk and the Cross-Section of Stock Returns

60 Pages Posted: 18 Nov 2021 Last revised: 26 Mar 2024

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 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, and follows the intra-year pattern of the underlying natural peril. 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

Suggested Citation

Braun, Alexander and Braun, Julia and Weigert, Florian, Extreme Weather Risk and the Cross-Section of Stock Returns (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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