Extreme Weather and Financial Market Uncertainty

Kmetz, Augustus; Kruttli, Mathias S.; Roth Tran, Brigitte; Watugala, Sumudu W.; Yan, Alan

Journal Article

Extreme Weather and Financial Market Uncertainty

Abstract: Extreme weather can have negative, minimal, or even positive effects on business performance—creating significant uncertainty about outcomes for those businesses. Financial markets show heightened uncertainty among investors for companies that have been hit by hurricanes. This uncertainty persists for several months after a hurricane’s landfall, as reflected by continued discussion of hurricanes in analyst calls. Comparing expected volatility to actual volatility shows that markets have underreacted to the uncertainty caused by hurricanes. After Hurricane Sandy, a particularly salient hurricane for investors, this market underreaction appears to have diminished.

Keywords: weather; climate risk; climate-related financial risk;