Carbon Tail Risk

Ilhan, Emirhan; Sautner, Zacharias; Vilkov, Grigory

doi:10.1093/rfs/hhaa071

Cited by 1,136Climate Change Policy and EconomicsSustainable Finance and Green BondsStochastic processes and financial applications

Carbon Tail Risk

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Ilhan, Emirhan, Sautner, Zacharias, Vilkov, Grigory·2021·The Review of Financial Studies

DOI 10.1093/rfs/hhaa071

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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.

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Ilhan, Sautner, and Vilkov (2021) show that for equities, the cost of option protection against downside tail risk is larger for firms with greater carbon intensity.
“Ilhan, Sautner, and Vilkov (2021) show that for equities, the cost of option protection against downside tail risk is larger for firms with greater carbon intensity.”
From Presidential Address: Sustainable Finance and ESG Issues— Value versus Values (2023) · cites this paper as Ilhan, Sautner, and Vilkov (2021)

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Authors: Ilhan, E., Sautner, Z., & Vilkov, G.
Affiliations: University of Zurich (CH)
Frankfurt School of Finance & Management (DE)
Corresponding author: Sautner, Zacharias
ORCID: Ilhan, Emirhan
Sautner, Zacharias
Vilkov, Grigory
Venue: The Review of Financial Studies
Publisher: Oxford University Press (OUP)
Published: 2020-06-27
Volume: 34
Issue: 3
Pages: 1540-1571
ISSN: 0893-9454 (ISSN-L)
1465-7368
DOI: 10.1093/rfs/hhaa071
OpenAlex: W3121471843
Cited by: 1,136
References: 59
Citations by year: 2026: 292 · 2025: 279 · 2024: 202 · 2023: 152 · 2022: 105 · 2021: 58 · 2020: 28 · 2019: 12 · 2018: 6 · 2017: 1 · 2016: 1
FWCI: 39.53
Type: journal article
Language: en
Open access: green
doi.org
Licence: academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model (vor)
Locations: Review of Financial Studies (publishedVersion)
SSRN Electronic Journal (publishedVersion)
Zurich Open Repository and Archive (University of Zurich) (acceptedVersion, other-oa)
RePEc: Research Papers in Economics (submittedVersion)
Zurich Open Repository and Archive (University of Zurich) (submittedVersion, other-oa)
Zurich Open Repository and Archive (University of Zurich)
Topics: Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Climate Change Policy and Economics
Social Sciences › Economics, Econometrics and Finance › Finance › Sustainable Finance and Green Bonds
Social Sciences › Economics, Econometrics and Finance › Finance › Stochastic processes and financial applications
Keywords: climate policy uncertainty, carbon-intensive firms, options market, downside risk protection, climate change skepticism, Trump administration, carbon pricing

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