Blame it on the weather: Market implied weather volatility and firm performance

57 Pages Posted: 26 Jul 2023 Last revised: 4 Jul 2024

See all articles by Joon Woo Bae

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management

Yoontae Jeon

McMaster University - Michael G. DeGroote School of Business

Stephen Szaura

BI Norwegian School of Business

Virgilio Zurita

Southern Illinois University - Southern Illinois University at Carbondale

Date Written: July 5, 2023

Abstract

We introduce a novel measure of weather risk implied from weather options' contracts. WIVOL captures risks of future temperature oscillations, increasing with climate uncertainty about physical events and regulatory policies. We find that idiosyncratic weather risk shocks are priced, worsen firms' operating performance and increase the uncertainty about firms' fundamentals, suggesting that firms, on average, do not fully hedge exposures to weather risk. We estimate returns' exposure to WIVOL innovations and show that more negatively exposed firms are valued at a discount, with investors demanding higher compensations to hold these stocks. Firms' exposure to local but not foreign WIVOL predicts returns, which confirms the geographic nature of weather risk.

Keywords: JEL Classification: G11, G12, Q54 climate finance, option prices, stock returns, weather risk

JEL Classification: G11, G12, Q54

Suggested Citation

Bae, Joon Woo and Jeon, Yoontae and Szaura, Stephen and Zurita, Virgilio, Blame it on the weather: Market implied weather volatility and firm performance (July 5, 2023). Available at SSRN: https://ssrn.com/abstract=4515327 or http://dx.doi.org/10.2139/ssrn.4515327

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Yoontae Jeon

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Stephen Szaura

BI Norwegian School of Business ( email )

(47) 406-01-607 (Phone)

HOME PAGE: http://https://www.bi.edu/about-bi/employees/department-of-finance/stephen-walter-szaura/

Virgilio Zurita (Contact Author)

Southern Illinois University - Southern Illinois University at Carbondale ( email )

Rehn Hall - Mail Code 4626
Carbondale, IL Illinois 62901-4515
United States

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