Abstract

I analyze the pricing of climate risk by studying on implied volatility in option markets before Atlantic Hurricane Season peaks. I find that climate risk is priced in the equity option market. Put options whose lives span peak period of hurricane season become more expensive compared to call options in hurricane season. In addition, price differences between OTM put options and ATM call options covering the peak period of hurricane season is higher than price differences of the same type of options in non-hurricane season. The results also suggest that hurricane season forecasts and property information of REITs in affected regions together influence the price of options through implied volatility skew of equity options.