Temperature, Aggregate Risk, and Expected Returns
AbstractIn this paper we show that temperature is an aggregate risk factor that adversely affects economic growth. Our argument is based on evidence from global capital markets which shows that the covariance between country equity returns and temperature (i.e., temperature betas) contains sharp information about the cross-country risk premium; countries closer to the Equator carry a positive temperature risk premium which decreases as one moves farther away from the Equator. The differences in temperature betas mirror exposures to aggregate growth rate risk, which we show is negatively impacted by temperature shocks. That is, portfolios with larger exposure to risk from aggregate growth also have larger temperature betas; hence, a larger risk premium. We further show that increases in global temperature have a negative impact on economic growth in countries closer to the Equator, while its impact is negligible in countries at high latitudes. Consistent with this evidence, we show that there is a parallel between a country's distance to the Equator and the economy's dependence on climate sensitive sectors; in countries closer to the Equator industries with a high exposure to temperature are more prevalent. We provide a Long-Run Risks based model that quantitatively accounts for cross-sectional differences in temperature betas, its link to expected returns, and the connection between aggregate growth and temperature risks.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17575.
Date of creation: Nov 2011
Date of revision:
Note: AP EEE EFG
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- E0 - Macroeconomics and Monetary Economics - - General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-14 (All new papers)
- NEP-DGE-2011-11-14 (Dynamic General Equilibrium)
- NEP-MAC-2011-11-14 (Macroeconomics)
- NEP-RMG-2011-11-14 (Risk Management)
- NEP-UPT-2011-11-14 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
- Ravi Bansal & Amir Yaron, 2004.
"Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles,"
Journal of Finance,
American Finance Association, vol. 59(4), pages 1481-1509, 08.
- Ravi Bansal & Amir Yaron, 2000. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," NBER Working Papers 8059, National Bureau of Economic Research, Inc.
- Monika Piazzesi & Martin Schneider, 2006.
"Equilibrium Yield Curves,"
NBER Working Papers
12609, National Bureau of Economic Research, Inc.
- Harjoat S. Bhamra & Lars-Alexander Kuehn & Ilya A. Strebulaev, 2010. "The Levered Equity Risk Premium and Credit Spreads: A Unified Framework," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 645-703, February.
- Robert E. Hall & Charles I. Jones, 1999.
"Why Do Some Countries Produce So Much More Output per Worker than Others?,"
NBER Working Papers
6564, National Bureau of Economic Research, Inc.
- Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
- Ravi Bansal & Robert F. Dittmar & Christian T. Lundblad, 2005. "Consumption, Dividends, and the Cross Section of Equity Returns," Journal of Finance, American Finance Association, vol. 60(4), pages 1639-1672, 08.
- Jacob, Brian A. & Lefgren, Lars & Moretti, Enrico, 2005.
"The Dynamics of Criminal Behavior: Evidence from Weather Shocks,"
Working Paper Series
rwp05-003, Harvard University, John F. Kennedy School of Government.
- Brian Jacob & Lars Lefgren & Enrico Moretti, 2007. "The Dynamics of Criminal Behavior: Evidence from Weather Shocks," Journal of Human Resources, University of Wisconsin Press, vol. 42(3).
- Brian Jacob & Lars Lefgren & Enrico Moretti, 2004. "The Dynamics of Criminal Behavior: Evidence from Weather Shocks," NBER Working Papers 10739, National Bureau of Economic Research, Inc.
- Lars Peter Hansen & John C. Heaton & Nan Li, 2008.
"Consumption Strikes Back? Measuring Long-Run Risk,"
Journal of Political Economy,
University of Chicago Press, vol. 116(2), pages 260-302, 04.
- Lars Peter Hansen & John Heaton & Nan Li, 2005. "Consumption Strikes Back?: Measuring Long-Run Risk," NBER Working Papers 11476, National Bureau of Economic Research, Inc.
- Crocker, Thomas D & Horst, Robert L, Jr, 1981. "Hours of Work, Labor Productivity, and Environmental Conditions: A Case Study," The Review of Economics and Statistics, MIT Press, vol. 63(3), pages 361-68, August.
- Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
- Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 29-42, February.
- Rob Aalbers, 2013. "Optimal Discount Rates for Investments in Mitigation and Adaptation," CPB Discussion Paper 257, CPB Netherlands Bureau for Economic Policy Analysis.
- Ravi Bansal & Marcelo Ochoa, 2011. "Welfare Costs of Long-Run Temperature Shifts," NBER Working Papers 17574, National Bureau of Economic Research, Inc.
- Mutascu, Mihai, 2012. "Influence of clime conditions on tax revenues," MPRA Paper 40324, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.