The extreme temperature factor in asset pricing models: Evidence from Europe

Mariano González-Sánchez, Raquel Arguedas Sanz and Ana I. Segovia San Juan

Finance Research Letters, 2024, vol. 66, issue C

Abstract: Growing concern about climate change has led to increased research into the effects of climate on markets. One of the weather variables studied is temperature. The previous studies considered that the temperature influences on asset returns through changes in investor mood. There are few studies that incorporate a risk factor to analyze the effects of temperature changes on asset returns. We extract positive and negative extreme temperature changes to design three temperature factors. By a cross-section asset pricing model, we find evidence that temperature shocks (hot and cold) show a significant monthly risk premium and skewness for temperature changes.

Keywords: Asset pricing model; Multifactor model; Temperature factor; Temperature shocks (search for similar items in EconPapers)
JEL-codes: C58 G12 Q54 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:66:y:2024:i:c:s1544612324006500

DOI: 10.1016/j.frl.2024.105620

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