Pricing test of temperature volatility premium in Tehran Security Exchange

Temperature volatility can affect making profit of firms. The power of making profit effect on the firm’s future and its growth rate. While investors are trading in the security markets they consider the price and profit making power of the firms and their dividends. So investors expect more return when they tolerance temperature volatility risk. The aim of this study is to test pricing of temperature volatility risk in Tehran security exchange. We use a novel methodology named “Tracking portfolio” to extract temperature volatility risk premium and then test the pricing of this premium. To test our hypothesis, we chose a sample consist of about 160 firms listed in Tehran security exchange from 1385 to 1395. We use time series regressions and to make our results more robust in addition on 6 fama-french portfolios we use 30 industry portfolios as the test assets. Results show that temperature volatility risk premium is priced in both 6 fama-french and 30 industry portfolios in Tehran security exchange. In other words, the news and information engaged with temperature changing in 1 year later is important for investors trading decisions and they expect more return on their assets when they tolerance temperature volatility risk.