Climate events and return comovement

Abstract

We show that individual stock returns comove more with market returns when there are climate disasters such as hurricanes and floods. Comovement increases in the month of and the month following the disaster before declining back to normal levels. The disaster impact is stronger in recessions and crisis periods but is evident in all periods. The increased return correlation stems more from an increase in covariance than an increase in stock or market standard deviation. Moreover, we show climate events have a greater impact on comovement in stocks with greater sensitivity to their local economy and higher information asymmetry.