An equilibrium asset pricing model with heterogeneous beliefs about climate risks

We introduce the investors with preferences for wealth and environmental externality to a general equilibrium setting in which they disagree on the depreciation of the greenhouse gas emissions. We show that the disagreement generates negative effects on the stock prices, but it imposes positive influences on the price of the climate call option. We present that the premium of stock with claims to the green goods becomes lower, whereas that of the stock with claims to the brown goods becomes higher, as the degree of brown aversion raising. Importantly, we also illustrate that accounting for heterogeneous beliefs coupled with brown aversion helps to rationalize the size and dynamics of the climate call option market. Intuitively, anticipating quickly depreciate of the greenhouse gas emissions, the optimistic investor values the implicit insurance in the climate option less valuable for him and implements portfolio plans with selling out more the climate call option, which enlarges the size of climate option market. Different from the influences of the disagreement, our model delivers that the size of the climate call option is compressed when the degree of brown aversion increases. • Modeling disagreement about climate risks and brown aversion in a united framework. • Deriving new predictions about behavior of stock options • Both disagreement and brown aversion impact size of climate option market. • Disagreement about climate risks creates a demand for insurance.