Extreme weather risk and the cost of equity

Alexander Braun, Julia Braun and Florian Weigert

No 23-08, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: We examine if extreme weather exposure impacts firms' cost of equity. Motivated by a consumption-based asset pricing model with heterogeneous agents, we reveal the existence of 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 thunderstorm losses earned excess returns of 6.5% p.a. over those with the most positive sensitivity. This premium can neither be explained by risk factors from standard asset pricing models nor by firm characteristics. Our results reveal a novel link between climate risk and firm value.

Keywords: Extreme Weather Risk; Climate Risk; Cost of Equity; Empirical Asset Pricing (search for similar items in EconPapers)
JEL-codes: C12 G01 G11 G12 G17 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-env, nep-fdg and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:281206

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