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What Do Financial Markets Reveal about Global Warming?

Author

Listed:
  • 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.

Suggested Citation

  • Ron Balvers & Ding Du & Xiaobing Zhao, 2009. "What Do Financial Markets Reveal about Global Warming?," Working Papers 09-04, Department of Economics, West Virginia University.
  • Handle: RePEc:wvu:wpaper:09-04
    as

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    File URL: http://be.wvu.edu/phd_economics/pdf/09-04.pdf
    File Function: First version, 2009
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Asset Pricing; Global Warming; Cost of Capital; Tracking Portfolios.;

    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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