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Extreme weather risk and the cost of equity

Author

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  • Braun, Alexander
  • Braun, Julia
  • Weigert, Florian
Abstract
We examine if extreme weather exposure impacts firms' cost of equity. Motivated by a consumption-based asset pricing model with heterogeneous agents, we reveal the existence of an extreme weather risk premium in the cross-section of stock returns. In the period from 1995 to 2019, domestic U.S. stocks with the most negative sensitivity to thunderstorm losses earned excess returns of 6.5% p.a. over those with the most positive sensitivity. This premium can neither be explained by risk factors from standard asset pricing models nor by firm characteristics. Our results reveal a novel link between climate risk and firm value.

Suggested Citation

  • Braun, Alexander & Braun, Julia & Weigert, Florian, 2023. "Extreme weather risk and the cost of equity," CFR Working Papers 23-08, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:281206
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    More about this item

    Keywords

    Extreme Weather Risk; Climate Risk; Cost of Equity; Empirical Asset Pricing;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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