Pricing Poseidon: Extreme Weather Uncertainty and Firm Return Dynamics
50 Pages Posted: 4 Dec 2018 Last revised: 1 Oct 2019
Date Written: October 1, 2019
We investigate the uncertainty dynamics surrounding extreme weather events through the lens of option and stock markets by identifying market responses to the uncertainty regarding both potential hurricane landfall and subsequent economic impact. Stock options on firms with establishments exposed to the landfall region exhibit large increases in implied volatility of up to 30 percent, reflecting impact uncertainty. Impact uncertainty persists for several months after landfall. Using hurricane forecasts, we show both landfall uncertainty and potential impact uncertainty are reflected in prices before landfall. Our findings are consistent with investors paying attention to hurricanes as they unfold.
Keywords: extreme weather events, uncertainty, implied volatility, stock returns, hurricanes, climate finance
JEL Classification: G12, G14, Q54
Suggested Citation: Suggested Citation