An analytical framework to price long‐dated climate‐exposed assets

Pauline Chikhani and Jean‐Paul Renne

Quantitative Economics, 2025, vol. 16, issue 4, 1093-1146

Abstract: This paper uses a tractable stochastic integrated‐assessment model to analyze the influence of climate change on asset returns across time and maturity. Quasi‐analytical, or recursive, formulas allow to price various long‐dated assets, including fixed‐income products, derivatives, and equities. We find that climate risks will increasingly drive down long‐term risk‐free yields, reducing them by about 30 basis points by the end of the century. This decline reflects weaker growth and increased uncertainty, leading to a rise in precautionary savings. We illustrate the concept of climate risk premiums by examining model‐implied prices of long‐term assets vulnerable to sea level rise or temperatures. Climate risk premiums are particularly sensitive to damage assumptions.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:wly:quante:v:16:y:2025:i:4:p:1093-1146

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