Carbon Tail Risk

By Emirhan Ilhan, Zacharias Sautner, Grigory Vilkov. The Review of financial studies, 2020

724 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/948aa0e5e0a87e5addd16b862ea8d6a6aa3d7239

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Citations in the corpus

Firms and social responsibility: A review of ESG and CSR research in corporate finance (2021, background): “In contrast, the previously discussed Iliev and Roth (2020) study finds that ESG/CSR changes are slower in the presence of concentrated ownership by large institutional investors. Hwang, Titman, and Wang (2017) find that after controlling for firms’ ESG/CSR scores, those firms that experience an inc”
The Pricing of Carbon Risk in Syndicated Loans: Which Risks are Priced and Why? (2021, background): “The literature thus far has mostly focused on scope 1 emissions – emissions from owned or controlled sources of a firm (Capasso et al (2020) and Kleimeier and Viehs (2019)).”
Does the CDS Market Reflect Regulatory Climate Risk Disclosures? (2020, positive): “…of recent studies use either carbon emissions (Chen and Gao, 2012; Andersson et al., 2016; Liesen et al., 2017; Jung et al., 2018; In et al., 2019; Ilhan et al., 2019b; Ramelli et al., 2018) or ESG scores (Görgen et al., 2019) to proxy for climate risk.9 Ginglinger and Moreau (2019) use a…”
Investor Rewards to Climate Responsibility: Stock-Price Responses to the Opposite Shocks of the 2016 and 2020 U.S. Elections (2021, positive): “See Gillan, Koch, and Starks (2021) for a survey of the literature on shareholder value effects of CSR/ESG. 6 Ilhan, Sautner, and Vilkov (2021), and Pankratz and Schiller (2019).7 Our paper complements this new strand of research by showing that investor rewards to climate-responsible…”
Climate Risk and Capital Structure (2019, background): “identified in Ilhan et al. (2019). We thus rule out the possibility that our findings account for”
Sustainable investing in equilibrium (2019, neutral): “Ilhan, Sautner, and Vilkov (2020) show that firms with higher carbon emissions exhibit more tail risk and more variance risk.”
Dissecting Climate Risks: Are they Reflected in Stock Prices? (2021, result): “This is consistent both with our hedging explanation of the documented positive premium for climate-policy risk and with previous findings in the literature, that investors have become aware of climate change risks only in the most recent years (Krueger et al. (2020), Painter (2020), Bolton and Kacp”