Carbon Tail Risk

43 Pages Posted: 19 Jul 2018 Last revised: 30 Jan 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: January 28, 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. 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

Ilhan, Emirhan and Sautner, Zacharias and Vilkov, Grigory, Carbon Tail Risk (January 28, 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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