Carbon Tail Risk

The Review of Financial Studies, forthcoming

56 Pages Posted: 19 Jul 2018 Last revised: 3 Sep 2020

See all articles by Emirhan Ilhan

Emirhan Ilhan

Frankfurt School of Finance & Management

Zacharias Sautner

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

Grigory Vilkov

Frankfurt School of Finance & Management

Date Written: June 12, 2020

Abstract

Strong regulatory actions are needed to combat climate change, but climate policy uncertainty makes it difficult for investors to quantify the impact of future climate regulation. We show that such uncertainty is priced in the option market. The cost of option protection against downside tail risks is larger for firms with more carbon-intense business models. For carbon-intense firms, the cost of protection against downside tail risk is magnified at times when the public’s attention to climate change spikes, and it decreased after the election of climate change skeptic President Trump.

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 (June 12, 2020). The Review of Financial Studies, forthcoming, 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://emirhanilhan.github.io

Zacharias Sautner (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 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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