Hydroclimatic risk mispricing: Evidence from China

Jiaming Su and Yongqiao Wang

Global Finance Journal, 2025, vol. 67, issue C

Abstract: Hydroclimate can cause huge damage to human production and business activities. To evaluate whether stock markets efficiently price the hydroclimatic risk, the paper calculates the Hydroclimatic Sensitivity Score (HSS) for listed firms of China based on the Palmer Drought Severity Index (PDSI) in 1990 – 2022. HSS measures the firm-level physical risk associated with hydroclimate. Empirical results of the Fama–Macbeth regression indicate a significant relationship between HSS and stock return. Portfolios based on HSS exhibit significant positive α, which confirms the existence of hydroclimatic mispricing. Mechanism analysis shows that both the firm scale and the long-term debt tolerance can reduce a firm’s HSS, thus causing underpricing of hydroclimatic risk.

Keywords: Hydroclimate; Mispricing; Chinese stock returns; Hydroclimatic Sensitivity Score (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:67:y:2025:i:c:s1044028325000845

DOI: 10.1016/j.gfj.2025.101157

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