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Climate risks and market efficiency

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  • Hong, Harrison
  • Li, Frank Weikai
  • Xu, Jiangmin

Abstract

Climate science finds that the trend towards higher global temperatures exacerbates the risks of droughts. We investigate whether the prices of food stocks efficiently discount these risks. Using data from thirty-one countries with publicly-traded food companies, we rank these countries each year based on their long-term trends toward droughts using the Palmer Drought Severity Index. A poor trend ranking for a country forecasts relatively poor profit growth for food companies in that country. It also forecasts relatively poor food stock returns in that country. This return predictability is consistent with food stock prices underreacting to climate change risks.

Suggested Citation

  • Hong, Harrison & Li, Frank Weikai & Xu, Jiangmin, 2019. "Climate risks and market efficiency," Journal of Econometrics, Elsevier, vol. 208(1), pages 265-281.
    • Handle: RePEc:eee:econom:v:208:y:2019:i:1:p:265-281
    DOI: 10.1016/j.jeconom.2018.09.015
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    More about this item

    Keywords

    Climate risks; Climate change; Stock market; Efficiency; Return predictability;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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