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Title: | Temperature shocks and the cost of equity capital: implications for climate change perceptions |
Authors: | Balvers, Ronald J. Du, Ding Zhao, Xiaobing Michael Lee-Chin & Family Institute for Strategic Business Studies |
Department: | None |
Keywords: | Asset pricing;Climate change;Cost of capital;Tracking portfolios |
Publication Date: | Oct-2015 |
Series/Report no.: | Michael Lee-Chin & Family Institute for Strategic Business Studies Working Paper ; 2015-08 |
Abstract: | Financial market information can provide an objective assessment of losses anticipated from climate change. In a Merton-type asset pricing model, with asset prices affected by perceived changes in investment opportunities due to climate change, 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 climate change are 0.22 percent, implying a present value loss of 7.92 percent of wealth. These costs complement previous estimates of the cost of climate change. Valuation Insight: Balvers, Du, and Zhao consider how climate change affects market values in different industries and should be a factor in valuation. They show that costs of equity capital increase in the industries most vulnerable to climate change resulting from uncertainty about the extent of climate change. They estimate for the U.S. a present value cost of around eight percent of wealth due to climate change. |
Description: | 54 p. ; Includes bibliographical references (pp. 37-42). ; "October 2015." ; The authors thank seminar participants at the University of Canterbury, Monash University, the Financial Management Association meetings, and the AAEA Annual Meeting, and Glenn Boyle, Eric Crampton, Mike Dempsey, Robert Faff, John Fountain, Philip Gharghori, Seamus Hogan, Petko Kalev, and Ed Maberly for helpful comments. |
URI: | http://hdl.handle.net/11375/19074 |
Appears in Collections: | Michael Lee-Chin & Family Institute for Strategic Business Studies Working Paper Series |
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sbv_wp_2015-08.pdf | 419.58 kB | Adobe PDF | View/Open |
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