Climate risks and market efficiency

• Main Authors: HONG, Harrison, LI, Frank Weikai, XU, Jiangmin
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Climate Risks; Climate Change; Stock Market; Efficiency; Return Predictability; Environmental Sciences; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5966; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6965/viewcontent/Climate_Risks_Market_Efficiency_2017_pp.pdf
• Institution: Singapore Management University

Climate science finds that the trend towards higher global temperatures exacerbates the risks of droughts. We investigate whether the prices of food stocks efficiently discount these risks. Using data from thirty-one countries with publicly-traded food companies, we rank these countries each year based on their long-term trends toward droughts using the Palmer Drought Severity Index. A poor trend ranking for a country forecasts relatively poor profit growth for food companies in that country. It also forecasts relatively poor food stock returns in that country. This return predictability is consistent with food stock prices underreacting to climate change risks.