Pessimism toward climate disasters and asset prices: A quantitative investigation

Shiba Suzuki () and Hiroaki Yamagami ()
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Shiba Suzuki: Faculty of Economics, Seikei University
Hiroaki Yamagami: Faculty of Economics, Seikei University

Economics Bulletin, 2025, vol. 45, issue 1, 595 - 605

Abstract: This paper explores the pricing of economic risks from climate change in financial markets. Unlike previous models that treat climate change-induced disasters as independent and identically distributed events, our model uses a Markov stochastic process to account for disaster persistence and incorporates subjective probabilities to reflect investors' ambiguity aversion. We find that pessimistic assessments of climate disaster risks lead to significantly higher risk premiums and lower risk-free rates, even if the intertemporal elasticity of substitution is lower than 1. This study contributes to the literature on climate change and asset pricing by emphasizing the role of subjective probability and offering quantitative evaluations within a recursive utility framework.

Keywords: subjective expectations; climate change; disasters; equity premium (search for similar items in EconPapers)
JEL-codes: E1 G1 (search for similar items in EconPapers)
Date: 2025-03-30
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