Arbeitspapier
Climate change financial risks: Pricing and portfolio allocation
There are concerns that climate-related physical and political risks are not yet properly reflected in asset prices. To address these concerns, we develop a dynamic asset pricing framework with two sources of rare disasters: macroeconomic events and climate change. We link carbon emissions and portfolio composition with the stochastically-varying probability of climate-related events. Using theory and simulations we study the implications of the imminent threat of climate change on different market measures and on the participation of carbon-intensive assets in the market portfolio. We also obtain closed-form solutions for market prices and the Social Cost of Carbon. Our results suggest that climate change implies a positive and increasing risk premium. We also show that, with the observed trends in climate change, macroeconomic risk works as a hedge against catastrophic climate change, such that the aggregate equity premium may remain unaltered. The transition risk of climate policy substantially lowers the participation of carbon-intensive assets in the market portfolio.
- Language
-
Englisch
- Bibliographic citation
-
Series: Economics Working Paper Series ; No. 19/327
- Classification
-
Wirtschaft
Portfolio Choice; Investment Decisions
Asset Pricing; Trading Volume; Bond Interest Rates
Environment and Growth
Valuation of Environmental Effects
Climate; Natural Disasters and Their Management; Global Warming
- Subject
-
Climate change
Risk premia
Rare events
Policy Risk
Stranded assets
- Event
-
Geistige Schöpfung
- (who)
-
Karydas, Christos
Xepapadeas, Anastasios
- Event
-
Veröffentlichung
- (who)
-
ETH Zurich, CER-ETH - Center of Economic Research
- (where)
-
Zurich
- (when)
-
2019
- DOI
-
doi:10.3929/ethz-b-000380385
- Handle
- Last update
-
10.03.2025, 11:43 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Karydas, Christos
- Xepapadeas, Anastasios
- ETH Zurich, CER-ETH - Center of Economic Research
Time of origin
- 2019
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