Temperature Changes & The Cost of Equity Capital; Evidence from Tracking Portfolio Approach
Quarterly Journal of Securities Exchange

Quarterly Journal of Securities Exchange

Temperature Changes & The Cost of Equity Capital; Evidence from Tracking Portfolio Approach

Document Type : Original Article

Authors
Maryam Davallou 1
Maryam amouei 2
1 Department of Financial Management and Insurance, Faculty of Management and Accounting, Shahid Beheshti University, Tehran, Iran
2 Department of Financial Management, Faculty of Management, Danesh Alborz University, Qazvin, Iran.
10.22034/jse.2025.12476.2300
Abstract
Temperature fluctuations resulting from climate change can be considered as one of the factors causing uncertainty, causing investors to worry about their assets and leading to an increase in their expected returns. This study aims to investigate the effect of temperature changes on the cost of equity. For this purpose, the risk premium of temperature changes has been calculated. We employ the economic tracking portfolio approach, and its pricing is examined using Fama-MacBeth regression (1973). 
We chose a sample with about 170 firms in the Tehran Stock Exchange in the period of 2000 to 2020. The results show that the risk premium of temperature changes is positive and significant, causing a 35% change in the cost of equity. However, this effect did not exhibit an increasing trend over the research period. The results of quantile regression also confirm the mentioned findings.
Keywords
Tracking portfolios
Temperature change
Cost of equity capital
Quantile regression
Subjects
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Quarterly Journal of Securities Exchange
Volume 18, Issue 70
Summer 2025
Pages 77-104