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| Shiba Suzuki and Hiroaki Yamagami |
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| ''Pessimism toward climate disasters and asset prices: A quantitative investigation'' |
| ( 2025, Vol. 45 No.1 ) |
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| This paper explores the pricing of economic risks from climate change in financial markets. Unlike previous models that treat climate change-induced disasters as independent and identically distributed events, our model uses a Markov stochastic process to account for disaster persistence and incorporates subjective probabilities to reflect investors' ambiguity aversion. We find that pessimistic assessments of climate disaster risks lead to significantly higher risk premiums and lower risk-free rates, even if the intertemporal elasticity of substitution is lower than 1. This study contributes to the literature on climate change and asset pricing by emphasizing the role of subjective probability and offering quantitative evaluations within a recursive utility framework. |
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| Keywords: subjective expectations, climate change, disasters, equity premium |
JEL: G1 - General Financial Markets
E1 - General Aggregative Models: General |
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| Manuscript Received : Jan 21 2025 | | Manuscript Accepted : Mar 30 2025 |
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