Stock Price Reactions to Climate Events: An Asset Pricing Perspective

Abstract

The main purpose of this paper is to see if some industries are more exposed to climate risk than others and if this climate risk is priced. I have taken an events study approach that focuses on climate change related events to answer this question. Events discussed and analyzed in this paper include US presidential elections from 1992 to present, climate disaster events in the US from 1990 to present, and major climate policy agreements and meetings from 1992 to present. I have included a variety of historical events in order to obtain a more holistic view of how investors react to various events related to climate change. I focus my analysis on the sector level and examine the differences in returns for nearly every sector contained in the CRSP US Stock Database. While the methodology implemented changes somewhat depending on the type of climate event, each method that I implement in this paper uses an asset pricing model. In each I use the five Fama-French factors in order to determine the effect that climate events will have on stock pricing above what is suggested by these factors.