 Risk premiums from temperature trendsRichard P. Gregory International Review of Economics & Finance, 2024, vol. 91, issue C, 505-525 Abstract: Previous estimates of temperature shock risk premiums in the stock market have been biased by the use of the Fama-MacBeth estimator, the use of monthly portfolios, and the neglect that temperature time-series can exhibit both short- and -long-term components. From the previous literature, we know that temperature shocks can increase equity premiums through a number of channels. I use the Jegadeesh et al. (2019) EIV estimation method and daily individual stock returns from the NYSE, ASE and NASDAQ from July 1, 1963 to Dec. 31, 2020, to correct for the estimation bias, and I divide the temperature series into long- and short -term components. I also control for productivity shocks, non-linearity and macroeconomic variables. I find that the US Short-Term, US Long-Term and the World Long-Term Temperature factors are significantly priced by the market at less than the 1% level. Together, these three components are estimated to raise the cost of equity in the United States by 3.1% per year, higher than previous estimates. Keywords: Risk premium estimation; Temperature shocks; Instrumental variables; Individual stocks; Asset pricing models (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:91:y:2024:i:c:p:505-525 DOI: 10.1016/j.iref.2024.01.011 Access Statistics for this article International Review of Economics & Finance is currently edited by H. Beladi and C. Chen More articles in International Review of Economics & Finance from Elsevier |
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