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The extreme temperature factor in asset pricing models: Evidence from Europe

Author

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  • González-Sánchez, Mariano
  • Arguedas Sanz, Raquel
  • Segovia San Juan, Ana I.

Abstract

Growing concern about climate change has led to increased research into the effects of climate on markets. One of the weather variables studied is temperature. The previous studies considered that the temperature influences on asset returns through changes in investor mood. There are few studies that incorporate a risk factor to analyze the effects of temperature changes on asset returns. We extract positive and negative extreme temperature changes to design three temperature factors. By a cross-section asset pricing model, we find evidence that temperature shocks (hot and cold) show a significant monthly risk premium and skewness for temperature changes.

Suggested Citation

  • González-Sánchez, Mariano & Arguedas Sanz, Raquel & Segovia San Juan, Ana I., 2024. "The extreme temperature factor in asset pricing models: Evidence from Europe," Finance Research Letters, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:finlet:v:66:y:2024:i:c:s1544612324006500
    DOI: 10.1016/j.frl.2024.105620
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset pricing model; Multifactor model; Temperature factor; Temperature shocks;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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