ISQD Published Papers

Authors: Oliver Tietjen, Kai Lessmann and Michael Pahle
Published in: Resource and Energy Economics, 2021
Tags: Carbon Pricing, Theory

Abstract: Cap-and-trade programs such as the European Union’s Emissions Trading System (EU ETS) expose firms to considerable risks, to which the firms can respond with hedging. We develop an intertemporal stochastic equilibrium model to analyze the implications of hedging by risk-averse firms. We show that the resulting time-varying risk premium depends on the size of the permit bank. Applying the model to the EU ETS, we find that hedging can lead to a U-shaped price path, because prices initially fall due to negative risk premiums and then rise as the hedging demand declines. The Market Stability Reserve (MSR) reduces the permit bank and thus, increases the hedging value of the permits. This offers an explanation for the recent price hike, but also implies that prices may decline in the future due to more negative risk premiums. In addition, we find higher permit cancellations through the MSR than previous analyses, which do not account for hedging. Read more.

Authors: Andrew McConnell, Boyan Yanovski, and Kai Lessmann
Published in: Climate Policy, 2021
Tags: Central Banking

Abstract: Central banks can play an important role in the transition towards a climate-neutral economy. This paper discusses different green monetary policy instruments along the dimensions of feasibility of implementation and impact on the transition process. We identify the inclusion of ‘brown’ collateral haircuts into a central bank’s collateralized lending framework as the most promising conduit of green monetary policy. The impact of such interventions on the real economy is then formally explored by extending a general equilibrium transition model to include a simple banking sector with central bank lending facilities and collateral adjustments. We find that both ‘brown’ collateral haircuts and ‘green hairgrowth’ increase carbon neutral investment while decreasing carbon intensive investment and emissions. Consequently, in addition to decreasing the exposure of the central bank balance sheet to climate-related risks, climate-based collateral adjustments have the potential of increasing the political feasibility of a timely transition to a carbon neutral economy by affecting emission levels. Despite ‘green hairgrowth’ having a stronger effect on investment and emissions, ‘brown’ collateral haircuts remain the recommended policy as the former is not necessarily ‘market neutral’ and thus cannot be broadly applied across central banks. Read more.

Authors: Michael Koetter, Felix Noth and Oliver Rehbein
Published in: Journal of Financial Intermediation, 2020
Tags: Physical Climate Risk, Corporate Governance, Banking, Empirical

Abstract: We show that local banks provide corporate recovery lending to firms affected by adverse regional macro shocks. Banks that reside in counties unaffected by the natural disaster that we specify as macro shock increase lending to firms inside affected counties by 3%. Firms domiciled in flooded counties, in turn, increase corporate borrowing by 16% if they are connected to banks in unaffected counties. We find no indication that recovery lending entails excessive risk-taking or rent-seeking. However, within the group of shock-exposed banks, those without access to geographically more diversified interbank markets exhibit more credit risk and less equity capital. Read more.

Authors: Alex Stomper and Tobias Geiger
Published as: PNAS Letter, 2020
Tags: Physical Climate Risk, Damage Functions, Macroeconomics, Econometrics

Abstract: The recent paper by Coronese et al. reports a rise in economic damages due to extreme natural disasters reported in the Emergency Events Database (EM-DAT). While Coronese et al.’s paper is timely and relevant, we have serious concerns regarding the analysis and the interpretation of the results. First, the dependent variable of Coronese et al.’s main model is, according to the definition in EM-DAT, a measure of capital stock (CS) damages, and CS data should therefore be used as a control variable. While CS data are contained in the Penn World Table (PWT), Coronese et al. instead used gross domestic product (GDP) data from the same source. Read more.

Authors: Claudia Lambert, Felix Noth, and Ulrich Schüwer
Published in: Review of Finance, 2019
Tags: Physical Climate Risk, Banking, Empirical

Abstract: This paper explores how banks react to an exogenous shock caused by Hurricane Katrina in 2005, and how the structure of the banking system affects economic development following the shock. Independent banks based in the disaster areas increase their risk-based capital ratios after the hurricane, while those that are part of a bank holding company on average do not. The effect on independent banks mainly comes from the subgroup of highly capitalized banks. These independent and highly capitalized banks increase their holdings in government securities and reduce their total loan exposures to non-financial firms, while also increasing new lending to these firms. With regard to local economic development, affected counties with a relatively large share of independent banks and relatively high average bank capital ratios show higher economic growth than other affected counties following the catastrophic event. Read more.

Authors: Felix Noth and Oliver Rehbein
Published in: Finance Research Letters, 2019
Tags: Physical Climate Risk, Corporate Governance, Empirical

Abstract: We investigate firm outcomes after a major flood in Germany in 2013. We robustly find that firms located in the disaster regions have significantly higher turnover, lower leverage, and higher cash in the period after 2013. We provide evidence that the effects stem from firms that already experienced a similar major disaster in 2002. Overall, our results document a positive net effect on firm performance in the direct aftermath of a natural disaster. Read more.

Authors: Xavier Giroud, Holger M. Mueller, Alex Stomper and Arne Westerkamp
Published in: The Review of Financial Studies, 2012
Tags: Physical Climate Risk, Corporate Governance, Banking, Empirical

Abstract: Based on a sample of highly leveraged Austrian ski hotels undergoing debt restructurings, we show that reducing a debt overhang leads to a significant improvement in operating performance. Changes in leverage in the debt restructurings are instrumented with Unexpected Snow, which captures the extent to which a ski hotel experienced unusually good or bad snow conditions prior to the debt restructuring. Unexpected Snow provides lending banks with the counterfactual of what would have been the ski hotel’s operating performance in the absence of strategic default, allowing them to distinguish between ski hotels that are in distress due to negative demand shocks (“liquidity defaulters”) and those that are in distress due to debt overhang (“strategic defaulters”). Read more.