Carbon Tail Risk
The Review of Financial Studies, forthcoming
56 Pages Posted: 19 Jul 2018 Last revised: 16 Jan 2021
Date Written: June 12, 2020
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: Suggested Citation