Asset Pricing with Disagreement about Climate Risks

51 Pages Posted: 8 Jun 2023 Last revised: 25 Nov 2024

See all articles by Thomas Lontzek

Thomas Lontzek

RWTH-Aachen University

Walt Pohl

NHH Norwegian School of Economics

Karl Schmedders

IMD

Marco Thalhammer

RWTH Aachen University

Ole Wilms

University of Hamburg; Tilburg University - Tilburg University School of Economics and Management

Date Written: June 8, 2023

Abstract

This paper analyzes how climate risks are priced on financial markets. We show that climate tipping thresholds, disagreement about climate risks, and preferences that price in long-run risks are crucial to an understanding of the impact of climate change on asset prices. Our model simultaneously explains several findings that have been established in the empirical literature on climate finance: (i) news about climate change can be hedged in financial markets, (ii) the share of green investors has significantly increased over the past decade, (iii) investors require a positive, although small, climate risk premium for holding "brown" assets, and (iv) "green" stocks outperformed "brown" stocks in the period 2011-2021. The model can also explain why investments in mitigating climate change have been small in the past. Finally, the model predicts a strong, non-linear increase in the marginal gain from carbon-reducing investments as well as in the carbon premium if global temperatures continue to rise.

Keywords: Asset pricing, carbon premium, climate news, climate risk, heterogeneous beliefs, long-run risk, risk sharing

JEL Classification: G11, G12, Q54

Suggested Citation

Lontzek, Thomas and Pohl, Walt and Schmedders, Karl and Thalhammer, Marco and Wilms, Ole, Asset Pricing with Disagreement about Climate Risks (June 8, 2023). Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2023, Available at SSRN: https://ssrn.com/abstract=4473164 or http://dx.doi.org/10.2139/ssrn.4473164

Thomas Lontzek

RWTH-Aachen University

Walt Pohl

NHH Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway

Karl Schmedders

IMD ( email )

Ch. de Bellerive 23
P.O. Box 915
CH-1001 Lausanne
Switzerland

Marco Thalhammer

RWTH Aachen University

Ole Wilms (Contact Author)

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

HOME PAGE: http://www.olewilms.com

Tilburg University - Tilburg University School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

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