Pricing Poseidon: Extreme Weather Uncertainty and Firm Return Dynamics

112 Pages Posted: 4 Dec 2018 Last revised: 9 Nov 2024

See all articles by Mathias S. Kruttli

Mathias S. Kruttli

Kelley Business School - Indiana University

Brigitte Roth Tran

Federal Reserve Bank of San Francisco

Sumudu W. Watugala

Indiana University - Kelley School of Business - Department of Finance

Multiple version iconThere are 3 versions of this paper

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

Kruttli, Mathias S. and Roth Tran, Brigitte and Watugala, Sumudu W., Pricing Poseidon: Extreme Weather Uncertainty and Firm Return Dynamics (November 09, 2024). Available at SSRN: https://ssrn.com/abstract=3284517 or http://dx.doi.org/10.2139/ssrn.3284517

Mathias S. Kruttli (Contact Author)

Kelley Business School - Indiana University ( email )

Bloomington, IN 47405
United States

Brigitte Roth Tran

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Sumudu W. Watugala

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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