Climate risks and market efficiency

Author

Harrison HONG, Columbia University
Frank Weikai LI, Singapore Management UniversityFollow
Jiangmin XU, Peking University

Publication Type

Journal Article

Version

submittedVersion

Publication Date

1-2019

Abstract

Climate science finds that the trend towards higher global temperatures exacerbates the risks of droughts. We investigate whether the prices of food stocks efficiently discount these risks. Using data from thirty-one countries with publicly-traded food companies, we rank these countries each year based on their long-term trends toward droughts using the Palmer Drought Severity Index. A poor trend ranking for a country forecasts relatively poor profit growth for food companies in that country. It also forecasts relatively poor food stock returns in that country. This return predictability is consistent with food stock prices underreacting to climate change risks.

Keywords

Climate Risks, Climate Change, Stock Market, Efficiency, Return Predictability

Discipline

Environmental Sciences | Finance | Finance and Financial Management

Research Areas

Finance

Publication

Journal of Econometrics

Volume

208

Issue

1

First Page

265

Last Page

281

ISSN

0304-4076

Identifier

10.1016/j.jeconom.2018.09.015

Publisher

Elsevier: 24 months

Citation

HONG, Harrison; LI, Frank Weikai; and XU, Jiangmin. Climate risks and market efficiency. (2019). Journal of Econometrics. 208, (1), 265-281.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/5966

Copyright Owner and License

Authors

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Additional URL

https://doi.org/10.1016/j.jeconom.2018.09.015