Essays in Financial Intermediation and Climate Economics

This thesis represents the final product of my PhD studies at the Department of Finance, the Center for Financial Frictions (FRIC), and the Center for Big Data in Finance (BigFi), at Copenhagen Business School. The thesis consists of three chapters. The chapters are self-contained and can be read independently.
The first chapter, “Intermediary Option Pricing,” shows that intermediaries’ option in-ventory and equity il-liquidity can explain most of the option risk premium. Intermediaries are exposed to equity price “gap risk” at night, when equity il-liquidity impedes hedging their options inventory. When intermediaries bear more gap risk, option returns are more negative. When equities are more liquid, option returns are less negative.
The second chapter, “The Derivative Payoff Bias,” documents a novel channel through which option market makers’ inventory hedging creates price pressure in the underlying equities: Charm. Charm spikes immediately before derivative payoffs are calculated and thus creates a derivative payoff bias, which exceeds $3bn a year.
The third chapter, “Carbon VIX: Carbon Price Uncertainty and Decarbonization In-vestments,” presents the first index of emission price uncertainty: the Carbon VIX. To that end, we exploit the prices of options on emission allowances in the European Emission Trading System. Emission price uncertainty (i) is high, (ii) spikes around important climate announcements, and (iii) reduces firms’ decarbonization investments. To study this con-nection, we measure expected aggregate decarbonization investments from the stock returns for “carbon solution providers”, which are firms that help other firms decarbonize.