Optimism on Pollution-Driven Disasters and Asset Prices

Shiba Suzuki and Hiroaki Yamagami

No 2020.06, Working Papers from FAERE - French Association of Environmental and Resource Economists

Abstract: This study explores how investors' optimism about the likelihood of pollution-driven disaster occurrence affects asset prices. Environmental pollution resulting from economic activities raises the probability of disaster occurrence. However, the relationship between economic activities, pollution, and disaster occurrence is difficult to ascertain. Thus, investors make decisions based on subjective expectation; specifically, they subjectively evaluate the probability of disaster occurrence to be lower than its objective probability. As demonstrated in this study, the equity premiums under conditions of objective expectation are significantly higher than those under subjective expectation conditions only if a representative agent has high Intertemporal Elasticity of Substitution (IES). This discrepancy in asset returns is related to the propensity of individuals to discount events occurring in the "distant future" as described in existing literature.

Keywords: Expectations; Disasters; Equity Premium Puzzles; Discount Rate; Climate Change (search for similar items in EconPapers)
JEL-codes: E71 G12 Q54 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2020-02
New Economics Papers: this item is included in nep-ene, nep-env and nep-upt
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http://faere.fr/pub/WorkingPapers/Suzuki_Yamagami_FAERE_WP2020.06.pdf First version, 2020 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:fae:wpaper:2020.06

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