Carbon Tail Risk
43 Pages Posted: 19 Jul 2018 Last revised: 30 Jan 2019
Date Written: January 28, 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. The effect of carbon emissions is concentrated among firms in high-emission industries, amplified at times when investor attention to global warming is high, and larger for firms with bigger institutional ownership. These findings provide some first evidence that investors incorporate information about carbon emissions when assessing corporate risk profiles. Higher emissions are also associated with higher uncertainty about firm fundamentals as perceived by market participants.
Keywords: carbon risk, tail risk, climate finance, climate risk
JEL Classification: G13, G32, Q54
Suggested Citation: Suggested Citation