Temperature, Aggregate Risk, and Expected Returns

Bansal, Ravi; Ochoa, Marcelo

doi:10.2139/ssrn.1572654

Cited by 33 publications

(60 citation statements)

References 13 publications

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“…Bansal and Ochoa (2011b), for instance, find that a global temperature shock (i.e., a rise in temperature of 0.2˝C) reduces world consumption growth by 0.2 percentage points (pp). They also observe that this effect lasts for several years.…”

Section: Related Literaturementioning

confidence: 99%

“…Fischer andSpringborn (2011) andHeutel (2012), for instance, investigate how optimal climate policies should be designed under stochastic productivity shocks. Bansal and Ochoa (2011b) propose an augmented long-run risk model in which temperature negatively impacts long-run growth. Specifically, the model captures the long-lasting effect that global temperature has on world consumption growth observed in the data.…”

Section: Related Literaturementioning

confidence: 99%

“…Specifically, the model captures the long-lasting effect that global temperature has on world consumption growth observed in the data. Based on the empirical evidence that temperature shocks undermine TFP growth, Donadelli, Jüppner, Riedel, and Schlag (2017), following the approach of Bansal and Ochoa (2011b), integrate U.S. temperature dynamics into a production-based model featuring recursive preferences, long-run productivity risk, and investment adjustment costs. We differ from these theoretical approaches aiming at studying the macroeconomic effects of climate change-related phenomena in that we analyze the welfare implications of rising temperatures within a stochastic endogenous growth framework.…”

Section: Related Literaturementioning

confidence: 99%

“…In the spirit of Bansal and Ochoa (2011b), we first estimate a bivariate VAR model of G7 Business Enterprise Expenditure in R&D (BERD) growth and global temperature. 4 The impulse response is depicted in Figure 1 (Panel A) and shows that a shock in global temperature reduces G7 private R&D spending by 0.6pp.…”

Section: The Factsmentioning

confidence: 99%

“…More specifically, we introduce temperature dynamics as modeled in Bansal and Ochoa (2011b) into an endogenous growth model in the spirit of Kung and Schmid (2015) where temperature shocks negatively affect R&D investments. In our novel stochastic endogenous growth model, we find that temperature risk produces sizable welfare costs (i.e., 11% of lifetime consumption) that can be offset by subsidizing capital investment with around 22% of total government expenditures.…”

Section: Introductionmentioning

confidence: 99%

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Global Temperature, R&D Expenditure, and Growth

et al. 2017

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Climate change and global warming are critical developments and are inevitably shaping the global economy and society. Population health, agricultural value added, infrastructure, productivity -to mention just few spheres -are all affected by climatic conditions, albeit to a varying extent. The agenda of academic and international policy debate is dominated by two fundamental questions. First, what are the long-term consequences of global warming on the economy and society? Second, how could the economy and society adapt to global warming in the least disruptive way?In terms of the first question, there is a widespread belief that climate change poses major challenges and risks to global economic activity. Specifically, our empirical exercise shows that positive temperature shocks lead to a reduction in the growth rate of business R&D expenditure, which ranges from 0.6 to 0.84 percentage points in the G7 countries. We subsequently develop a general equilibrium model that accounts for this empirical finding. Particularly, we assume that temperature shocks have a negative influence on the accumulation of patents. Therefore, climate change has disruptive effects on economic activity by increasing the patent obsolescence rate, which in turn places a constraint on the growth rate of the economy. We further show that temperature shocks are associated with declining welfare. Under a plausible scenario, a positive temperature shock manifests in an 11% decrease of welfare in the long run.This study also delves into the second question that is concerned about the optimal economic policy response. Our results indicate that governments need to spend 22.2% of their budgets as capital investment subsidy in order to fully compensate for the welfare costs caused by global temperature risk. The benchmark case scenario is then extended to cater to a broad range of different eventualities and to vindicate our qualitative research findings. How such government spending ought to be structured is left for future research. Taken together, our findings indicate that governments need to incorporate the stylized temperature change, output, and welfare nexus into the governments' objective function and that governments should fight the adverse consequences of global warming rather aggressively.Electronic copy available at: https://ssrn.com/abstract=3075229Global Temperature, R&D Expenditure, and Growth Michael Donadelli * Patrick Grüning ** Marcus Jüppner *** Renatas Kizys **** This version: November 15, 2017 AbstractWe shed new light on the macroeconomic effects of rising temperatures. In the data, a shock to global temperature dampens expenditures in research and development (R&D). We rationalize this empirical evidence within a stochastic endogenous growth model, featuring temperature risk and growth sustained through innovations. In line with the novel evidence in the data, temperature shocks undermine economic growth via a drop in R&D. Moreover, in our endogenous growth setting temperature risk generates non-negligible welfare costs ...

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Section: Related Literaturementioning

confidence: 99%

Section: Related Literaturementioning

confidence: 99%

Section: Related Literaturementioning

confidence: 99%

Section: The Factsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Global Temperature, R&D Expenditure, and Growth

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Global Climate Risk Index and Firm Performance: Evidence from Turkish Firms

Cavlak

Cebeci

Güneş

et al. 2021

Accounting, Finance, Sustainability, Governance &Amp; Fraud: Theory and Application

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Computing Macro-Effects and Welfare Costs of Temperature Volatility: A Structural Approach

et al. 2020

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We produce novel empirical evidence on the relevance of temperature volatility shocks for the dynamics of productivity, macroeconomic aggregates and asset prices. Using two centuries of UK temperature data, we document that the relationship between temperature volatility and the macroeconomy varies over time. First, the sign of the causality from temperature volatility to TFP growth is negative in the postwar period (i.e., 1950-2015) and positive before (i.e., 1800-1950). Second, over the pre-1950 (post-1950) period temperature volatility shocks positively (negatively) affect TFP growth. In the post-1950 period, temperature volatility shocks are also found to undermine equity valuations and other main macroeconomic aggregates. More importantly, temperature volatility shocks are priced in the cross section of returns and command a positive premium. We rationalize these findings within a production economy featuring long-run productivity and temperature volatility risk. In the model temperature volatility shocks generate non-negligible welfare costs. Such costs decrease (increase) when coupled with immediate technology adaptation (capital depreciation).

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Temperature, Aggregate Risk, and Expected Returns

Cited by 33 publications

References 13 publications

Global Temperature, R&D Expenditure, and Growth

Global Temperature, R&D Expenditure, and Growth

Global Climate Risk Index and Firm Performance: Evidence from Turkish Firms

Computing Macro-Effects and Welfare Costs of Temperature Volatility: A Structural Approach

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