Temperature shocks and the cost of equity capital

Implications for climate change perceptions

Ronald Balvers, Ding Du, Xiaobing Zhao

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

Financial market information can provide an objective assessment of losses anticipated from temperature changes. In an APT model in which temperature shocks are a systematic risk factor, the risk premium is significantly negative, loadings for most assets are negative, and asset portfolios in more vulnerable industries have stronger negative loadings on a temperature shock factor. Weighted average increases in the cost of equity capital attributed to uncertainty about temperature changes are 0.22 percent, implying a present value loss of 7.92 percent of wealth. These costs represent a new channel that may contribute to cost of climate change assessment.

Original languageEnglish (US)
Pages (from-to)18-34
Number of pages17
JournalJournal of Banking and Finance
Volume77
DOIs
StatePublished - Apr 1 2017

Fingerprint

Temperature
Climate change
Cost of equity capital
Costs
Assets
Uncertainty
Systematic risk
Market information
Present value
Wealth
Factors
Financial markets
Risk premium
Risk factors
Industry

Keywords

  • Asset pricing
  • Climate change
  • Cost of capital
  • Tracking portfolios

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Temperature shocks and the cost of equity capital : Implications for climate change perceptions. / Balvers, Ronald; Du, Ding; Zhao, Xiaobing.

In: Journal of Banking and Finance, Vol. 77, 01.04.2017, p. 18-34.

Research output: Contribution to journalArticle

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