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Do investors price physical climate risk? An analysis of weather-related power outages across the United States

Author

Listed:
  • Demir, Mert
  • Karataş, Cem O.
  • Martell, Terrence F.

Abstract

We investigate the effect of physical climate risk on the cross-section of U.S. stock returns. Using weather-related power outages as a novel proxy that captures the multifaceted nature of these risks, we show that firms headquartered in states with higher levels of aggregate physical climate risk earn higher returns. Using Google search volume index, we also document increased attention to climate change when weather events cause major power outages in a state. Other factors, such as an effective climate change response strategy and state-level climate policy, can moderate the relationship between physical climate risk and firms’ stock returns, while the dichotomy between physical and transition risks does not seem to play a significant role in our findings. Overall, our results suggest that physical climate risk is significantly priced in U.S. stocks, offering valuable insights for investors and other stakeholders navigating the evolving landscape of climate-related financial risks.

Suggested Citation

  • Demir, Mert & Karataş, Cem O. & Martell, Terrence F., 2026. "Do investors price physical climate risk? An analysis of weather-related power outages across the United States," Energy Economics, Elsevier, vol. 160(C).
    • Handle: RePEc:eee:eneeco:v:160:y:2026:i:c:s0140988326003452
    DOI: 10.1016/j.eneco.2026.109466
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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