Carbon Tail Risk

50 Pages Posted: 19 Jul 2018 Last revised: 3 Mar 2019

See all articles by Emirhan Ilhan

Emirhan Ilhan

Frankfurt School of Finance & Management gemeinnützige GmbH

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH; European Corporate Governance Institute (ECGI)

Grigory Vilkov

Frankfurt School of Finance & Management

Date Written: March 01, 2019

Abstract

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

Ilhan, Emirhan and Sautner, Zacharias and Vilkov, Grigory, Carbon Tail Risk (March 01, 2019). Available at SSRN: https://ssrn.com/abstract=3204420 or http://dx.doi.org/10.2139/ssrn.3204420

Emirhan Ilhan

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Zacharias Sautner (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Grigory Vilkov

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.vilkov.net

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