Nailing Down Volatile Temperatures: Examining Their Effects on Asset Prices

58 Pages Posted: 3 Feb 2022 Last revised: 4 Feb 2022

See all articles by Leonardo Bortolan

Leonardo Bortolan

University of Bologna

Atreya Dey

University of Edinburgh Business School

Luca Taschini

University of Edinburgh Business School; London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment

Date Written: February 2, 2022

Abstract

We present a statistic to generally represent extremes in the distribution of temperature anomalies and demonstrate its consequences on financial markets. The diverse shocks that our measure portrays are established to be primary drivers of electricity consumption and the weather futures market. We find that this metric is a significant factor in the cross-section of equity returns in specific industries. A spatial hedging strategy is developed to account for differentially exposed firms to temperature extremes, resulting in a large market-adjusted alpha for the least vulnerable firms. We end by explicitly investigating whether the price reaction to extreme temperatures results from firm operations or investor attention. In each step of our exercise, we contrast our measure with average temperature anomalies and demonstrate that our metric is the first-order feature.

Keywords: Climate change, Temperature variability, Temperature anomalies, Stock market, Climate news attention.

JEL Classification: C21, C23, G12, G32, Q54.

Suggested Citation

Bortolan, Leonardo and Dey, Atreya and Taschini, Luca, Nailing Down Volatile Temperatures: Examining Their Effects on Asset Prices (February 2, 2022). Available at SSRN: https://ssrn.com/abstract=4023755 or http://dx.doi.org/10.2139/ssrn.4023755

Leonardo Bortolan

University of Bologna ( email )

Via Belle Arti
Bologna, 40121
Italy

Atreya Dey (Contact Author)

University of Edinburgh Business School ( email )

Luca Taschini

University of Edinburgh Business School

29 Buccleuch Pl
Edinburgh, Edinburgh EH8 9JS
United Kingdom

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

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