Pricing Poseidon: Extreme Weather Uncertainty and Firm Return Dynamics
112 Pages Posted: 4 Dec 2018 Last revised: 9 Nov 2024
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Pricing Poseidon: Extreme Weather Uncertainty and Firm Return Dynamics
Pricing Poseidon: Extreme Weather Uncertainty and Firm Return Dynamics
Pricing Poseidon: Extreme Weather Uncertainty and Firm Return Dynamics
Date Written: November 09, 2024
Abstract
We empirically analyze firm-level uncertainty generated from extreme weather events, guided by a theoretical framework. Stock options of firms with establishments in a hurricane's (forecast) landfall region exhibit large implied volatility increases, reflecting significant uncertainty (before) after impact. Volatility risk premium dynamics reveal that investors underestimate such uncertainty. This underreaction diminishes for hurricanes after Sandy, a salient event that struck the U.S. financial center. Despite constituting idiosyncratic shocks, hurricanes affect hit firms' expected stock returns. Textual analysis of calls between firm management, analysts, and investors reveals that discussions about hurricane impacts remain elevated throughout the long-lasting high-uncertainty period after landfall.
Keywords: extreme weather, uncertainty, implied volatility, expected returns, climate risks
JEL Classification: G12, G14, Q54
Suggested Citation: Suggested Citation