Abstract: In this paper, climate risk is measured from two aspects: physical risk and transition risk. Specifically, temperature, sea level, precipitation are used to measure physical risk. And LDA method is used to analyze Chinese climate policy texts, from which we extract seven policy themes and then measure transition risks through the theme intensity. Based on the Fama-French factor model, this paper finds that both physical risk and transition risk have a significant negative impact on the excess return of the stock market, and enterprises with higher carbon emission intensity have a weak ability to resist the two kinds of risk shocks, while enterprises with larger scale have a strong ability to resist physical risk and a weak ability to mitigate transition risk. From the perspective of different climate risks degree, enterprises may be more susceptible to the impact of transition risk when facing high physical risk, and this negative impact is 5 times stronger than when they face low physical risk. This paper further explains the main effect with market expectations. The results show that the negative impact of physical risk is amplified by the effect of investors’ pessimistic expectations, while in the confront of transition risk, this effect and the information disclosure effect play a hedging role.

Key words: climate risk, physical risk, transition risk, excess stock return, market expectation