Is Physical Climate Risk Priced? Evidence from Regional Variation in Exposure to Heat Stress
We exploit regional variations in exposure to heat stress to study if physical climate risk is priced in municipal bond, corporate bond and equity markets. We find consistent evidence across asset classes that local exposure to heat stress is associated with higher yield spreads for bonds and higher conditional expected returns for stocks. These results are observed robustly starting in 2013–15. The fact that heat stress premium is (a) positive, (b) economically substantial, and (c) present across comprehensive samples of multiple asset classes is consistent with macroeconomic models where climate change has a direct negative impact on aggregate consumption.
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