Multifrequency Climate and Stock Returns

There are long-standing debates in the financial economics literature regarding long-run risks, return seasonality, the impact of weather and the impact of climate. By disentangling the data into different frequencies this paper contributes several results to these topics. I find significant evidence for a negative relationship between the high-minus-low (HML) value portfolio returns and US temperatures shocks. The correlation between temperature innovations and HML returns is on the order of -4% to -8% depending on the horizon. Strikingly, this relationship is weak during periods of long-term cooling and strong during periods of long-term warming. As part of this study I also document several other results from the data including that changes in minimum temperatures appear to be more financially significant than maximum temperatures, and that there is a key link between the January effect and the temperature-return relationship. I conclude by calibrating an asset pricing model that endogenously reproduces the main features of value stocks, growth stocks, and the relationship with temperature news