Feeling the Heat of Climate Change - How Sensitive Could It Be?

Abstract

This thesis examines if climate sensitivity predicts stock returns and how well this measurement performs. The sample consists of the S&P 500 and the monthly stock return for the period between 1979 to 2019. The method is first to estimate the climate sensitivity for stock returns from temperature anomaly. The data of the temperature anomaly comes from the National Oceanic Atmospheric Administration. The Fama & French three factors and the fourth factor from Carhart controls the results for robustness. Furthermore, five climate sensitivity portfolios were built, based on the estimated effect for each company, within the sample. The results show that there are differences amongst the industries and also the climate sensitivity portfolios. Firstly, two of the industries, Transport & Public Utilities, and Finance & Insurance & Real Estate, were significantly affected by changes in temperature anomaly. Also, the most climate-sensitive portfolio had the highest measurement between its stock returns and changes in the temperature anomaly. This portfolio also showed the highest weighted average monthly return.