We examine hurricane exposure as a systematic risk factor in the US stock market. Motivated by a consumption-based asset pricing model with heterogeneous agents, we derive a necessary and sufficient condition for a hurricane risk premium in the cross-section of stock returns. Empirically, we find that – in the period from 1995 to 2020 – stocks that react negatively to aggregate hurricane losses outperform stocks that react positively by almost 9% p.a. The hurricane premium is not explained by standard asset pricing risk factors nor stock characteristics. Our results emphasize the importance of climate risk for firms’ cost of capital.
Language
English
Keywords
Hurricane Risk
Consumption-Based Asset Pricing with Heterogeneous Agents