Extreme-weather risk and the cross-section of stock returns

Abstract

We document an extreme-weather risk premium in the cross-section of stock returns. Between 1995 and 2019, stocks of domestic U.S. firms with the most negative sensitivity to aggregate storm losses earned an annual excess-return spread of more than 6 percentage points relative to those with the most positive sensitivity, a difference not explained by standard factors. Fama-MacBeth regressions confirm that more negative storm-risk betas predict higher subsequent returns. The premium concentrates in geographically exposed and historically affected firms and in institutionally held stocks, consistent with fundamental-risk and salience channels. Our results establish a link between physical climate risk, the cost of equity, and ultimately firm value.