Abstract
This paper answers the research question of the impact of extreme climate events on stock returns. The article makes four contributions. Firstly, a method that permits the transposition of country-level climate related GDP losses into firm- level climate related fixed assets losses is put forward. Secondly, an economically significant factor that proxies for the risk factor in stock returns related to extreme climate events, LME, is proposed and tested in a Fama and French framework. Thirdly, the sensitivities of stock portfolios to the LME factor are found to be statistically highly significant. Fourthly, a climate stress test based upon the LME factor is presented. The climate stress test is able to show the impact of plausible but more severe extreme climate phenomena on stock returns.
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