Stern School of Business, New York University
44 West 4th Street
Institutional Affiliation: NYU
NBER Working Papers and Publications
|November 2015||Climate Change and Long-Run Discount Rates: Evidence from Real Estate|
with Stefano Giglio, Matteo Maggiori, Johannes Stroebel: w21767
The optimal investment to mitigate climate change crucially depends on the discount rate used to evaluate the investment’s uncertain future benefits. The appropriate discount rate is a function of the horizon over which these benefits accrue and the riskiness of the investment. In this paper, we estimate the term structure of discount rates for an important risky asset class, real estate, up to the very long horizons relevant for investments in climate change abatement. We show that this term structure is steeply downward-sloping, reaching 2.6% at horizons beyond 100 years. We explore the implications of these new data within both a general asset pricing framework that decomposes risks and returns by horizon and a structural model calibrated to match a variety of asset classes. Our analysi...