Extreme‐weather risk and the cross‐section of stock returns

Abstract We document an extreme‐weather risk premium in the cross‐section of stock returns. Between 1995 and 2019, stocks of domestic U.S. firms with the most negative sensitivity to aggregate storm losses earned an annual excess‐return spread of more than 6 percentage points relative to those with the most positive sensitivity, a difference not explained by standard factors. Fama‐MacBeth regressions confirm that more negative storm‐risk betas predict higher subsequent returns. The premium concentrates in geographically exposed and historically affected firms and in institutionally held stocks, consistent with fundamental‐risk and salience channels. Our results establish a link between physical climate risk, the cost of equity, and ultimately firm value.