Hurricane Risk and Asset Prices

We examine hurricane exposure as a systematic risk factor in the US stock market. Motivated by a consumption-based asset pricing model with heterogeneous agents, we derive a necessary and sufficient condition for a hurricane risk premium in the cross-section of stock returns. Empirically, we find that -- in the period from 1995 to 2020 -- stocks with a low sensitivity to aggregate hurricane losses outperform stocks with a high sensitivity by 8.9% per annum. The hurricane premium is not explained by standard asset pricing risk factors nor stock characteristics. Our results emphasize the importance of climate risk for firms’ cost of capital