Carbon Tail Risk
67 Pages Posted: 19 Jul 2018 Last revised: 13 Sep 2019
Date Written: September 12, 2019
We show that climate policy uncertainty is priced in the option market. The cost of option protection against tail and variance risks is larger for firms with more carbon-intense business models. For carbon-intense firms, the cost of protection is magnified at times when the public’s attention to climate change spikes, and it decreased after the election of climate-change denier Donald Trump. Corroborating an uncertainty channel behind these results, carbon-intense firms face significantly more questions by analysts about the uncertainty and the risks associated with environmental policies.
Keywords: carbon risk, tail risk, climate finance, climate risk
JEL Classification: G13, G32, Q54
Suggested Citation: Suggested Citation