Carbon Tail Risk

67 Pages Posted: 19 Jul 2018 Last revised: 13 Sep 2019

See all articles by Emirhan Ilhan

Emirhan Ilhan

Frankfurt School of Finance & Management

Zacharias Sautner

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

Grigory Vilkov

Frankfurt School of Finance & Management

Date Written: September 12, 2019

Abstract

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

Ilhan, Emirhan and Sautner, Zacharias and Vilkov, Grigory, Carbon Tail Risk (September 12, 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 ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://sites.google.com/view/emirhanilhan/

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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