Tuesday, September 21st @ 11:00-12:30 PM (ONLINE)
Hurricane Risk and Asset Prices
Alexander Braun, University of St. Gallen
ABSTRACT: We examine hurricane exposure as a systematic risk factor in the US stock market. Using a consumption-based asset pricing model with heterogeneous agents subject to uninsurable shocks, we derive a necessary and a sufficient condition for a hurricane risk premium. Empirically, both conditions are fulfilled in the period 1995−2020, characterized by elevated hurricane activity. We provide evidence for a significant and large hurricane risk premium in the same period, which withstands a comprehensive battery of asset pricing tests. Our results have major implications for firms’ cost of capital and cost of insurance in the face of climate change.