Filipe Oliveira Martins

Abstract:  We combine transaction-level brokerage data from a large Portuguese bank with detailed geospatial wildfire records to study how indirect exposure to extreme climate events affects household portfolio decisions. Exploiting geographic variation in retail investors’ proximity to wildfires, we show that individuals nearby wildfire events significantly reduce their risk-taking. This adjustment occurs through both increased selling and reduced purchases of risky assets in the months following a fire. The effects extend well beyond the burned perimeter and persist over time. We further document a substantial increase in the probability of fully liquidating portfolios and exiting the stock market, along with a decline in stock market entry. We find no evidence that these responses are driven by changes in wealth or background risk; instead, the evidence is consistent with a fear-based mechanism. Finally, we find that post-wildfire portfolios significantly underperform relative to pre-wildfire portfolios over 6-, 12-, and 24-month horizons.