Temperature and returns: a climatic approach to global asset pricing

Purpose This study investigates whether a country's long-run temperature profile, both its level and its year-to-year variability, helps explain cross-country differences in stock market returns, volatility, and risk-adjusted performance, and whether the evidence is consistent with innovation serving as a potential channel linking climate to financial markets. Design/methodology/approach Using an annual panel of more than 60 countries from 2000 to 2019, this paper constructs country-level temperature measures from publicly available surface-temperature data and combines them with equity-market data from Bloomberg. It estimates country-fixed-effects panel regressions of returns, volatility, and a risk-adjusted return measure on the temperature variables, with macroeconomic controls and cluster-robust standard errors. Evidence consistent with a potential innovation channel is evaluated using the Global Innovation Index, and robustness is assessed with year fixed effects and a 500-replication bootstrap. Findings Countries with a higher long-run average temperature exhibit higher average equity returns and lower volatility, and correspondingly higher risk-adjusted performance. Both the level and the variability of temperature are positively associated with national innovation, and innovation, in turn, is positively associated with returns and negatively associated with volatility. These linked associations are consistent with innovation serving as a potential channel, but they do not formally establish mediation. The estimates are stable to year fixed effects and bootstrap inference. Research limitations/implications The analysis documents robust cross-country associations rather than identifying causal effects. The construction of the temperature- and risk-adjusted return measures, along with the availability of innovation and risk-free rate data, conditions the interpretation of the results. Practical implications Climatic conditions appear to be a non-trivial source of cross-country dispersion in equity-market outcomes, with implications for international portfolio construction and for how climate change may reshape relative market performance. Social implications The findings suggest that innovation may be one potential channel connecting climate conditions with financial-market outcomes. Originality/value This paper provides novel cross-country evidence connecting climate, innovation, and equity-market outcomes, extending the climate-finance literature beyond firm-level and single-market settings and evaluating innovation as a potential transmission channel.