Pricing the Climate Risk:
Evidence from Option Markets during Flood and Hurricane Events
The project will help develop a better understanding of how investors react to climate events. As climate change is becoming a more serious problem, we still know little how investors react. The findings of the paper will help pension fund investors better price assets being affected by climate change
Using the flood season in Canada and hurricane season in the US, we will investigate options markets and test whether during the flood/hurricane seasons, investors price the risk of hurricanes relative to the periods just before and just after the season following Kelly, Pâstor, and Veronesi (2016). In their seminal work, the authors investigate whether investors price elections. Their model requires a specific period such as election time that can be evaluated using the options markets. The logic is that if investors price election risk, it should be reflected in the options market around election period as opposed to the pre-election periods and post-election periods. With the same logic, we will evaluate how investors price risk in futures markets during the flood/hurricane season compared to pre-hurricane season and post-hurricane season.
We expect to document evidence on whether investors’ risk perception changes by climate risk and aim to quantify climate risk using options market. This will be the first evidence on how investors price climate risk. A better understanding of climate risk will help investors and policy makers assess climate events and their impacts on asset values.
Dr. S. Mehmet Ozsoy
Dr. S. Mehmet Ozsoy is Assistant Professor of Financial Economics at Ozyegin University, Istanbul. He received his Ph.D. in Economics from Duke University in 2013. During the academic year of 2018/19 he was a visiting scholar at Ross Business School of University of Michigan. Dr. Ozsoy’s research interests include financial economics, asset pricing and financial intermediation. His work on correlation asymmetry received the Best Paper Award at the FMA European Conference in 2014. His research regarding the role of financial conglomerates in Turkish private pension fund system is published in the Emerging Markets Review. He also has a paper on bank regulation which is published in the Review of Financial Studies.