Pricing Climate Uncertainty: Evidence from Natural Interest Rates to Green Premiums

Climate change introduces a new dimension of systemic uncertainty that is complex, poorly understood, and difficult to quantify. Both physical and transition risks exhibit fat-tailed distributions, are underrepresented in historical data, and carry potentially unlimited downside exposure. These “green swan” events—rare but systemically significant climate shocks—pose challenges to macroeconomic stability, monetary policy, and financial market resilience. This thesis provides an integrated analysis of how climate risk is reflected in asset pricing—through both its influence on the risk-free rate and on risk premia across equity and fixed-income markets. The first chapter quantifies the long-term impact of climate change on natural interest rates over the past two centuries. Using panel fixed-effect and ARDL models on historical climate and economic data, it finds that temperature and precipitation anomalies significantly depress the natural rate, lending empirical support to low-discount-rate frameworks for climate policy evaluation. The second chapter examines how capital markets price transition risk through the issuance of green bonds. Leveraging a proprietary dataset from the Climate Bonds Initiative, it measures changes in equity beta following certified green bond issuance. Results show reduced systematic risk in issuer equity—particularly in developed markets and high-emission sectors—suggesting a hedging function for green assets in portfolio construction. The third chapter turns to physical climate risk and green bond performance. By linking location-specific bond asset data with national disaster records, it constructs a novel bond-disaster panel. Fixed effects and event study analyses reveal that green bonds exhibit resilience to extreme weather, with limited but delayed negative return impacts. These findings challenge the notion that green assets are uniformly more vulnerable to climate risk and underscore their role in building resilient portfolios. Together, the chapters offer new empirical insights into how climate risks—both chronic and acute—affect financial asset dynamics, providing guidance for investors and regulators seeking to manage climate-related financial exposures in a forward-looking and evidence-based manner.

Name dc:type.qualificationname

Doctor of Philosophy (PhD)

Level dc:type.qualificationlevel

Doctoral

Grantor dc:publisher.institution

University of Cambridge

Year dc:date.issued

2025

Author dc:creator

• Ouyang, Siyue

Advisor dc:contributor.advisor

• Larcom, Shaun

• Asset Pricing
• Climate Risk
• Green Bonds
• Natural Interest Rates
• Transition and Physical Risk

Licence

• https://www.repository.cam.ac.uk/bitstreams/e8ef8600-eb73-4363-8cda-189107fa9dd6/download
• http://purl.org/NET/rdflicense/allrightsreserved

Language dc:language

eng

DOI dc:identifier.doi

https://doi.org/10.17863/CAM.123831

OAI identifier oai:identifier

oai:www.repository.cam.ac.uk:1810/393515