Karydas, C., "Climate Change Financial Risks, Implications for Asset Pricing and Interest Rates" | WEBINAR
November 25, 2021
Title: Climate Change Financial Risks, Implications for Asset Pricing and Interest Rates
Speaker: Dr. Christos Karydas, Center of Economic Research at ETH Zürich
Host: Professor Evangelos Vassilatos, Department of Economics, Athens University of Economics and Business
Attachments: PDF of Relevant Paper
Abstact: In addition to rare macroeconomic disasters (e.g. wars, financial crises and pandemics), climate change poses a threat to financial stability - with extreme climatic events increasing in frequency and intensity and political risks putting pressure on asset valuations. To study the effect of a changing climate on asset prices and interest rates we include both sources of rare disasters in a dynamic CAPM with time-(and stochastically-) varying risk and recursive preferences. A changing climate makes former tail events more frequent and less predictable, increasing the premium of climate risk; interestingly, this change may not be fully reflected on the overall market risk premium that holds both components of risk: macroeconomic and environmental. The same is not true for interest rates, the return on sovereign debt and the participation of climate-risky assets in the market portfolio, that are expected to decline unambiguously as the planet warms.