Perceived climate risk and stock prices: an empirical analysis of pricing effects

Hachmi Ben Ameur, Daniel Dao, Zied Ftiti*, Wael Louhichi

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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Abstract

Increasing awareness of climate change and its potential consequences on financial markets has led to interest in the impact of climate risk on stock returns and portfolio composition, but few studies have focused on perceived climate risk pricing. This study is the first to introduce perceived climate risk as an additional factor in asset pricing models. The perceived climate risk is measured based on the climate change sentiment of the Twitter dataset with 16 million unique tweets in the years 2010–2019. One of the main advantages of our proxy is that it allows us to capture both physical and transition climate risks. Our results show that perceived climate risk is priced into Standard and Poor's 500 (S&P 500) Index stock returns and is robust when different asset-pricing models are used. Our findings have implications for market participants, as understanding the relationship between perceived climate risk and asset prices is crucial for investors seeking to navigate the financial implications of climate change and for policymakers aiming to promote sustainable financing and mitigate the potential damaging effects of climate risk on financial markets, and a pricing model that accurately incorporates perceived climate risk can facilitate this understanding.
Original languageEnglish
Number of pages54
JournalRisk Analysis
Early online date26 Dec 2024
DOIs
Publication statusE-pub ahead of print - 26 Dec 2024

Keywords

  • asset pricing
  • climate risk
  • perceived climate risk
  • physical climate risk
  • transition climate risks

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