The impact of climate risk on financial markets: evidence from bonds and options

This thesis examines how corporate environmental characteristics and market-based climate-risk exposure are associated with pricing outcomes in U.S. corporate bond and equity option markets. Three empirical essays extend research focused primarily on equities to fixed-income and derivative securities. The first essay examines corporate environmental performance and bond yield spreads. Using Refinitiv environmental (ENV) scores, it finds that greener firms have lower bond spreads. Portfolio differences are economically substantial, while controlled regression estimates are more modest. Carbon-intensity tests provide narrower emissions-based evidence, particularly for direct Scope 1 emissions. ENV measures broad environmental performance rather than climate-risk exposure, and the results do not establish causality. The second essay relates bond spreads to firms’ historical sensitivity to climate-attention and climate-news indices. Higher climate betas are associated with wider spreads. Transition- or policy-related exposure produces the largest and most consistent portfolio differentials, although physical-risk causes remain economically meaningful in some controlled specifications. These findings indicate that climate-related information is incorporated into spreads without establishing whether climate risk is fully or correctly priced. The third essay studies equity options using firm-level climate betas estimated from standardized option-premium returns and the Media Climate Change Concerns index. Higher lagged climate beta is associated with higher subsequent call and put returns. Their common positive pattern is consistent with volatility and tail-risk repricing, but the analysis does not distinguish risk compensation from underpricing, hedging demand, or other explanations. Together, the essays document associations across markets with distinct payoff structures, while leaving the underlying economic mechanisms unidentified causally.