Temperature volatility can affect making profit of firms. The power of making profit effect on the firm’s future and its growth rate. While investors are trading in the security markets they consider the price and profit making power of the firms and their dividends. So investors expect more return when they tolerance temperature volatility risk. The aim of this study is to test pricing of temperature volatility risk in Tehran security exchange. We use a novel methodology named “Tracking portfolio” to extract temperature volatility risk premium and then test the pricing of this premium. To test our hypothesis, we chose a sample consist of about 160 firms listed in Tehran security exchange from 1385 to 1395. We use time series regressions and to make our results more robust in addition on 6 fama-french portfolios we use 30 industry portfolios as the test assets. Results show that temperature volatility risk premium is priced in both 6 fama-french and 30 industry portfolios in Tehran security exchange. In other words, the news and information engaged with temperature changing in 1 year later is important for investors trading decisions and they expect more return on their assets when they tolerance temperature volatility risk.
Aretz, K., Bartram, S. M., & Pope, P. F. (2010). Macroeconomic risks and characteristic-based factor models. Journal of Banking & Finance, 34(6), 1383-1399.
Balvers, R., Du, D., & Zhao, X. (2017). Temperature shocks and the cost of equity capital: Implications for climate change perceptions. Journal of Banking & Finance, 77, 18-34.
Bopp, L., Monfray, P., Aumont, O., Dufresne, J.-L., Le Treut, H., Madec, G., & Orr, J. C. (2001). Potential impact of climate change on marine export production. Global Biogeochemical Cycles, 15(1), 81-99.
Breeden, D. T., Gibbons, M. R., & Litzenberger, R. H. (1989). Empirical Tests of the Consumption-Oriented CAPM. The Journal of Finance, 44231-262.
Cachon, G. P., Gallino, S., & Olivares, M. (2012). Severe weather and automobile assembly productivity.
Campbell, S. D., & Diebold, F. X. (2005). Weather Forecasting for Weather Derivatives. Journal of the American Statistical Association, 100(469), 6-16.
Cao, M., & Wei, J. (2005). Stock market returns: A note on temperature anomaly. Journal of Banking & Finance, 29(6), 1559-1573.
Chan, K. C., & Chen, N.-F. (1991). Structural and Return Characteristics of Small and Large Firms. The Journal of Finance, 46(4), 1467-1484.
Chang, C.-C. (2002). The potential impact of climate change on Taiwan's agriculture. Agricultural Economics, 27(1), 51-64.
Dell, M., Jones, B. F., & Olken, B. A. (2014). What Do We Learn from the Weather? The New Climate-Economy Literature. Journal of Economic Literature, 52(3), 740-798.
Du, D. (2014). Persistent exchange-rate movements and stock returns. Journal of International Financial Markets, Institutions and Money, 28, 36-53.
Ebrahimi, M., Heydarpour, F., & Jahanshad, A. (2012). The impact of climate on stock returns and volume. Master Thesis. Islamic Azad University, Central Tehran Branch. Faculty of Administrative & Economics (In Persian).
Fama, E. F., & French, K. R. (1996). Multifactor Explanations of Asset Pricing Anomalies. The Journal of Finance, 51(1), 55-84.
Floros, C. (2011). On the relationship between weather and stock market returns. Studies in Economics and Finance, 28(1), 5-13.
Hashemi, S., & Miraki, F. (2013). excess return of momentum risk in Tehran Security Exchange. Financial accounting researches, 1(8) (In Persian).
Jamali neyshaboor, A., Raee, R., Tehrani, R. (2013). Climate relation with stock returns and yield fluctuations in Tehran Stock Exchange. Master Thesis. Faculty of Management University of Tehran (In Persian).
Jensen, M. C. (1968). The Performance of Mutual Funds In The Period 1945â1964. The Journal of Finance, 23(2), 389-416.
Kapadia, N. (2011). Tracking down distress risk. Journal of Financial Economics, 102(1), 167-182.
Kordestani, g., & Alavi, s. (2010). The effect of accounting transparency on the cost of equity. Journal of Securities Exchange, 1(12), 43-61(In Persian).
Kregar, M. (2011). Cash flow based bankruptcy risk and stock returns in the US computer and electronics industry. University of Manchester.
Lamont, O. A. (2001). Economic tracking portfolios. Journal of Econometrics, 105(1), 161-184.
Lewellen, J., Nagel, S., & Shanken, J. (2010). A skeptical appraisal of asset pricing tests. Journal of Financial Economics, 96(2), 175-194.
Mashayekhi, b., Fadayinejad, m., & Kalaterahmani, r. (2010). Capital costs, accrual components and stock returns. Financial accounting researches, 1(1), 77-92 (In Persian).
O'Brien, K. L., & Leichenko, R. M. (2000). Double exposure: assessing the impacts of climate change within the context of economic globalization. Global Environmental Change, 10(3), 221-232.
Outecheva, N. (2007). Corporate financial distress: An empirical analysis of distress risk. University of St. Gallen.
Pourmohammadi, P., & Badri, A.(2017). Climate relation with returns and trading activities: Evidence from Tehran Stock Exchange. Asset management & Financing. 5(1), Summer 1396 (In Persian).
Raee, R., Farhadi, R., & SHirvani, A. (2011). Risk and return intemporal relationship: evidences of Intemporal Capital Asset Pricing. Financial management perspective, 1(2), 125-140 (In Persian).
Raee, R., Mahmoodi Azar, M., Gorgi, A. (2014). Investigating the Impact of Climate and Air Pollution on Tehran Stock Exchange Index. Institute for Humanities and Cultural Studies (In Persian).
Saunders, E. M. (1993). Stock Prices and Wall Street Weather. The American Economic Review, 83(5), 1337-1345.
Sohngen, B., & Mendelsohn, R. (1998). Valuing the Impact of Large-Scale Ecological Change in a Market: The Effect of Climate Change on U.S. Timber. The American Economic Review, 88(4), 686-710.
Tol, R. S. J. (2002). Estimates of the Damage Costs of Climate Change, Part II. Dynamic Estimates. Environmental and Resource Economics, 21(2), 135-160.
Vafaeepour, R., Houshmand, A. (2016). The relationship between climate variables fluctuations on stock Exchange Index and stock exchanges volume. The Fourth International Practical researches in management and accounting Conference. Shahid Beheshti University. https://www.civilica.com/Paper-AMSCONF04AMSCONF04. 511.html (In Persian).
Vassalou, M. (2003). News related to future GDP growth as a risk factor in equity returns. Journal of Financial Economics, 68(1), 47-73.
Yoon, S.-M., & Kang, S. H. (2009). Weather effects on returns: Evidence from the Korean stock market. Physica A: Statistical Mechanics and its Applications, 388(5), 682-690.
Zivin, J. G., & Neidell, M. (2014). Temperature and the Allocation of Time: Implications for Climate Change. Journal of Labor Economics, 32(1), 1-26.
vakili fard, H., hamidian, M., & taleb nia, G. A. (2019). Pricing test of temperature volatility premium in Tehran Security Exchange. Financial Management Perspective, 8(24), 35-62.
MLA
hamidreza vakili fard; mohsen hamidian; ghodrat allah taleb nia. "Pricing test of temperature volatility premium in Tehran Security Exchange", Financial Management Perspective, 8, 24, 2019, 35-62.
HARVARD
vakili fard, H., hamidian, M., taleb nia, G. A. (2019). 'Pricing test of temperature volatility premium in Tehran Security Exchange', Financial Management Perspective, 8(24), pp. 35-62.
VANCOUVER
vakili fard, H., hamidian, M., taleb nia, G. A. Pricing test of temperature volatility premium in Tehran Security Exchange. Financial Management Perspective, 2019; 8(24): 35-62.
)