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Briefing
Pricing and Mispricing of Climate Risks in U.S. Financial Markets
There is a rapidly growing research literature studying the effects of climate change risks on financial markets. Recent evidence suggests that markets have started to price climate risks. However, the extent of pricing varies across markets and time, and there is evidence of potential market inefficiencies. This article will highlight some key findings and their policy implications.
Journal Article
How Are Businesses Responding to Climate Risk?
Understanding what kinds of climate-related risks businesses could face is part of the Federal Reserve’s work to support a thriving economy and well-functioning financial system. To advance these goals, the San Francisco Fed surveyed businesses in its nine-state region to learn how they perceive and approach climate risk. Findings show that businesses view a changing climate as a moderate risk to their activities, particularly through possible regulation changes, higher input costs, and variations in demand. Many businesses are adopting formal risk mitigation strategies, including ...
Working Paper
Pricing Poseidon: Extreme Weather Uncertainty and Firm Return Dynamics
We present a framework to identify market responses to uncertainty faced by firms regarding both the potential incidence of extreme weather events and subsequent economic impact. Stock options of firms with establishments in forecast and realized hurricane landfall regions exhibit large increases in implied volatility, reflecting significant incidence uncertainty and long-lasting impact uncertainty. Comparing ex ante expected volatility to ex post realized volatility by analyzing volatility risk premia changes shows that investors significantly underestimate extreme weather uncertainty. After ...
Journal Article
Climate-Related Risks Faced by Low- and Moderate-Income Communities and Communities of Color: Survey Results
The impacts of climate change are creating new risks and exacerbating existing risks for individuals, communities, and the economy. Climate shocks and stresses disproportionately impact groups that have traditionally faced higher barriers to participating in the economy than the general population, including low-income communities, communities of color, and Tribal populations. Our team fielded a survey targeting professionals in the western United States from a broad range of sectors whose work on community development‒related issues impacts the personal and economic well-being of ...
Report
Climate Regulatory Risks and Corporate Bonds
Investor and policymaker concerns about climate risks suggest these risks should affect the risk assessment and pricing of corporate securities, particularly for firms facing stricter regulatory enforcement. Using corporate bonds, the authors find support for this hypothesis. Employing a shock to expected climate regulations, they show climate regulatory risks causally affect bond credit ratings and spreads. A structural credit model indicates that the increased spreads for high carbon issuers, especially those located in stricter regulatory environments, are driven by changes in firms' asset ...
Journal Article
Disruptions from Wildfire Smoke: Vulnerabilities in Local Economies and Disadvantaged Communities in the U.S.
Wildfires, which are increasing in frequency, duration, and intensity, are measurably affecting vulnerable populations, labor, housing, and education. This report describes how wildfire smoke disrupts various sectors of the economy across the United States. Wildfire smoke is a growing problem for groups that face greater economic barriers than the general population, such as low-income families, housing-vulnerable communities, and frontline workers.
Report
Insurance, Weather, and Financial Stability
In this paper, we introduce a model to study the interaction between insurance and banking. We build on the Federal Crop Insurance Act of 1980, which significantly expanded and restructured the decades-old federal crop insurance program and adverse weather shocks – over-exposure of crops to heat and acute weather events – to investigate some insights from our model. Banks increased lending to the agricultural sector in counties with higher insurance coverage after 1980, even when affected by adverse weather shocks. Further, while they increased risky lending, they were sufficiently ...