Carbon Tail Risk
50 Pages Posted: 19 Jul 2018 Last revised: 3 Mar 2019
Date Written: March 01, 2019
We estimate the effect of carbon emissions on left-tail risk for firms in the S&P 500 between 2010 and 2017. Higher carbon emissions increase downside risk, estimated in a forward-looking way from out-of-the-money put options. This effect is concentrated among firms in high-emission industries and amplified at times when investor attention to global warming is higher. Higher emissions are also associated with higher market uncertainty about firm fundamentals. Finally, we show that the 2015 Paris Agreement significantly increased tail risk among high-emission firms. Our findings provide some first evidence that investors incorporate information about climate risks when assessing risk profiles.
Keywords: carbon risk, tail risk, climate finance, climate risk
JEL Classification: G13, G32, Q54
Suggested Citation: Suggested Citation