Temperature shocks and the cost of equity capital: Implications for climate change perceptions
Ronald Balvers (),
Ding Du and
Journal of Banking & Finance, 2017, vol. 77, issue C, 18-34
Financial market information can provide an objective assessment of losses anticipated from temperature changes. In an APT model in which temperature shocks are a systematic risk factor, the risk premium is significantly negative, loadings for most assets are negative, and asset portfolios in more vulnerable industries have stronger negative loadings on a temperature shock factor. Weighted average increases in the cost of equity capital attributed to uncertainty about temperature changes are 0.22 percent, implying a present value loss of 7.92 percent of wealth. These costs represent a new channel that may contribute to cost of climate change assessment.
Keywords: Asset pricing; Climate change; Cost of capital; Tracking portfolios (search for similar items in EconPapers)
JEL-codes: G12 Q54 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:77:y:2017:i:c:p:18-34
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