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Julia Braun, University of St. Gallen, Institute for Insurance Economics; Alexander Braun, University of St. Gallen; Florian Weigert, University of Neuchatel
This paper examines how natural disaster risk feeds into the U.S. stock market and whether investors receive compensation for holding hurricane-sensitive stocks. Our paper theoretically motivates the natural catastrophe risk premium by consumption-based asset pricing with heterogenous agents subject to idiosyncratic labor income shocks. We show that the cross-section of expected stock returns reflects a premium for hurricane risk as measured by the individual stock return's regression coefficient with our hurricane risk factor. We contribute to the rare-disaster risk literature by explicitly focusing on natural catastrophe risk and by constructing a hurricane factor using all U.S. common stocks.