Pricing natural-disasters and climate-change risks: Insights from CAPM with self and externally excited jumps

D. Radi, M. Santacroce and B. Trivellato

Mathematics and Computers in Simulation (MATCOM), 2026, vol. 249, issue C, 583-610

Abstract: We study the effect of climate change on market’s risk premium and stock volatility through a general equilibrium asset pricing model with recursive preferences. We consider a financial market affected by environmental and macroeconomic shocks, both featuring time-varying intensities. Additionally, we incorporate the effects of green policies specifically targeting carbon-intensive assets. To capture the increasing frequency and clustering behavior of environmental risks, the model includes self-exciting and externally excited jump intensities for natural rare disasters. The representative agent’s consumption–investment maximization problem is solved in closed form, and the analytical results suggest that consumption disasters with time-varying probability reduce the risk-free interest rates while increasing the market’s premium and volatility of the stock market. The asymmetric impact of the transition risk on assets affects the optimal portfolio composition. Neglecting the clustering-like nature of environmental shocks lead to underestimate these effects.

Keywords: General-equilibrium asset pricing model; Climate-related risks; Rare events; Self-excited shocks; Externally-excited shocks; Time-varying risks (search for similar items in EconPapers)
JEL-codes: C61 G11 G12 Q51 Q54 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:249:y:2026:i:c:p:583-610

DOI: 10.1016/j.matcom.2026.05.016

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