In the Line of Fire: A Study of Market Efficiency in the Context of Wildfires and Stock Market Reactions

Abstract: Climate research finds that climate change and raising global temperatures increase the risk and severity of wildfires. However, the impact varies substantially based on geographical location and causes a dispersion in wildfire trends. Utilizing data from 14 countries, we investigate if wildfire severity trends have a material impact on the profitability of the forestry and paper & pulp (P&P) industries and whether the stock market is efficiently pricing these trends. We find that a poor wildfire trend ranking for a country forecasts lower profitability growth and that the market responds efficiently in terms of correctly pricing this climate change-related risk.