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What Do Financial Markets Reveal about Global Warming?

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Author Info

  • Ron Balvers

    (Department of Economics, West Virginia University)

  • Ding Du

    (Northern Arizona University)

  • Xiaobing Zhao

    (Northern Arizona University)

Abstract

Financial market information can provide an objective assessment of expected losses due to global warming. In a Merton-type asset pricing model, with asset prices affected by changes in investment opportunities caused by global warming, the risk premium is significantly negative and growing over time, loadings for most assets are negative, and asset portfolios in more vulnerable industries have stronger negative loadings on the global warming factor. Required returns are 0.11 percent higher due to global warming, implying a present value loss of 4.18 percent of wealth. These costs complement and exceed previous estimates of the cost of global warming.

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File URL: http://www.be.wvu.edu/phd_economics/pdf/09-04.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 09-04.

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Length: 42 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:wvu:wpaper:09-04

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Web page: http://www.be.wvu.edu/phd_economics/
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Keywords: Asset Pricing; Global Warming; Cost of Capital; Tracking Portfolios.;

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