Disasters, Beliefs, and the Behavior of Investors

This dissertation contains three essays in financial economics. The focus of the dissertation is to study how retail investors and the financial market react to the arrival or the possibility of disastrous events. In the first chapter, I explore the portfolio reaction to evidence of climate change by looking at how retail investors trade when they locally experience abnormal temperature. I test the hypothesis that retail investors will trade out of high emission stocks and trade into low emission stocks when experiencing abnormally high temperature through a channel of climate belief updating. Using detailed administrative records of retail investors’ positions and trading activities from a large financial institution, I construct measures of trading imbalances at the zip code level for various types of stocks and study the impact from abnormal temperature. I do not find evidence that investors trade out of high emission stocks or trade into low emission stocks when experiencing abnormally high temperature. The estimated effects are neither economically nor statistically significant. Moreover, investors are not dynamically adjusting their portfolios in response to abnormal temperat