Empirical studies provide mixed results on a physical climate risk premium. This paper demonstrates how measurement and estimation methods influence these findings. Once this is considered and using a purely climate-based measure at the facility level that avoids noisy estimates from news or firm disclosure, a small consistent premium only emerges when risks are combined into a spatially undiversifiable factor. The factor had a monthly discount of -0.19% from 2002 to 2022, with only 34% of its variation priced. The negative premium suggests that investors did not view climate risk as a disaster risk. It was likely undervalued and mispriced.
Authors: Quyen Nguyen (University of Otago), Ivan Diaz-Rainey (Griffith University), Adam Kitto (University of New South Wales), Nicholas Pittman (EMMI), Renzhu Zhang (University of Otago)
