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The pricing of global temperature shocks in the cost of equity capital

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  • Gregory, Richard P.

Abstract

Using an APT model where global temperature shocks are a systematically priced factor, the risk premium is significant and positive. Evidence is provided that positive exposure to temperature shocks is related to increasing CO2 emissions by industry. The global impact on the cost of equity could be as high as 2.8% per year, implying a global GDP loss of $2.2 Trillion per year due to global temperature shocks.

Suggested Citation

  • Gregory, Richard P., 2021. "The pricing of global temperature shocks in the cost of equity capital," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:intfin:v:72:y:2021:i:c:s104244312100038x
    DOI: 10.1016/j.intfin.2021.101319
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    More about this item

    Keywords

    Asset pricing; Climate change; Cost of capital; Tracking portfolio;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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