Carbon Tail Risk. (27th June 2020)

• Record Type: Journal Article
• Authors: Ilhan, Emirhan; Sautner, Zacharias; Vilkov, Grigory
• Editors: Koijen, Ralph
• Is Part Of: Review of financial studies. Volume 34:Number 3(2021)
• Page Start: 1540
• Page End: 1571
• Publication Date: 2020-06-27
• Subjects: G13 -- G32 -- Q54; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhaa071
• Languages: English
• ISSNs: 0893-9454

Abstract

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.