Seminar 217, Risk Management: "Hurricane Risk and Asset Prices" (Online)

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Submitted by Brandon Eltiste on July 31, 2021
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Online via Zoom
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Tuesday, September 21, 2021 - 11:00
About this Event

Alex Braun, University of St. Gallen

ABSTRACT: We examine hurricane exposure as a systematic risk factor in the US stock market. Using a consumption-based asset pricing model with heterogeneous agents subject to uninsurable shocks, we derive a necessary and a sufficient condition for a hurricane risk premium. Empirically, both conditions are fulfilled in the period 1995−2020, characterized by elevated hurricane activity. We provide evidence for a significant and large hurricane risk premium in the same period, which withstands a comprehensive battery of asset pricing tests. Our results have major implications for firms’ cost of capital and cost of insurance in the face of climate change.