Pricing Poseidon: Extreme Weather Uncertainty and Firm Return Dynamics

Mathias S. Kruttli, Brigitte Roth Tran and Sumudu Watugala

No 2019-054, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We investigate the uncertainty dynamics surrounding extreme weather events through the lens of option and stock markets by identifying market responses to the uncertainty regarding both potential hurricane landfall and subsequent economic impact. Stock options on firms with establishments exposed to the landfall region exhibit increases in implied volatility of 5-10 percent, reflecting impact uncertainty. Using hurricane forecasts, we show that landfall uncertainty and potential impact uncertainty are reflected in prices before landfall. We find no evidence that markets incorporate better hurricane forecasts than those from NOAA. Improvements to hurricane forecasts could have economically significant effects in financial markets.

Keywords: extreme weather events; uncertainty; implied volatility; stock returns; hurricanes; climate finance (search for similar items in EconPapers)
JEL-codes: G12 G14 Q54 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2019-07-17
New Economics Papers: this item is included in nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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https://www.federalreserve.gov/econres/feds/files/2019054pap.pdf (application/pdf)

Related works:
Working Paper: Pricing Poseidon: Extreme Weather Uncertainty and Firm Return Dynamics (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2019-54

DOI: 10.17016/FEDS.2019.054

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