We construct a measure of abnormal temperature variability, defined as deviations in intra-month temperature anomalies from a rolling historical baseline, to study its effects on firms and equity returns. Firms with higher exposure to variability experience lower revenues and fewer hours worked, driven by reductions in household spending and labor supply. An equity strategy based on cross-sectional variation in abnormal temperature variability yields a realized market-adjusted alpha of 4.9% annually. We find, however, pricing frictions in the form of greater return volatility and investor underreaction, stemming from uncertainty about firm-level impacts and disagreement over the materiality of temperature risks.

TYPE OF RESEARCH –Empirical

STAGE OF RESEARCH –First draft