Current Research

Working Papers

We show that Weitzman’s (2009) dismal theorem resurfaces naturally within a dynamic asset pricing framework with temperature-related disaster risk. If the climate disaster loss distribution is sufficiently fat-tailed, the risk-adjusted expected loss term diverges. Under unit elasticity of intertemporal substitution (EIS), this causes the social cost of carbon (SCC) to explode and the underlying optimization problem to have no finite solution so that the dynamic general equilibrium analogue of the dismal theorem applies. We suggest that, if the expected size of damages also increases with temperature, the fat tail becomes endogenous and the dismal mechanism is more likely to be activated at higher temperatures.

Work in Progress

I am currently working on the following projects, which are at various stages of development.

  • Asset Pricing, Monetary Policy, and Physical Climate Risk (with Carina Fleischer), early stage

This paper analyzes the interaction between physical climate risk, inflation, and monetary policy from an asset pricing perspective. We find evidence that climate shocks increase inflation in the short run. We embed this effect in a general equilibrium asset pricing model that builds on observable risk factors rather than latent factors.

We provide a simple model of the carbon premium that allows for biodiversity and climate risks. This analysis sheds light on the complex ways in which climate and biodiversity risks interact and how stock markets respond to these interconnected risks as they become more salient over time. We present empirical evidence on U.S. stock data that investors indeed jointly price firms’ exposure to climate transition risk and biodiversity risk. Our findings suggest that an increase in biodiversity risk increases stock returns, the more so if the company has higher emissions. Investors are thus more concerned about future financial performance of high-emission firms when biodiversity risk is high. This effect has become stronger after the Paris Agreement.

Presented at: QFAS Workshop (Tilburg University)

  • Climate Transition Risk in a Non-cooperative World (with Djep Dorelijers and Frederick van der Ploeg), first draft coming soon

We develop a tractable multi-country framework of climate risk with endogenous growth, international trade, recursive preferences, and strategic climate policy interactions. Countries transition between business-as-usual, moderate climate policy, and ambitious climate policy with transitions between regimes governed by a political Markov chain. We derive closed-form solutions for the social cost of carbon, optimal controls, and equilibrium exchange rates. We show that political transition risk affects asset prices through precautionary savings channels distinct from climate and macroeconomic disaster risk. Our calibration strategy matches both macroeconomic moments and asset pricing data across multiple regions, providing quantitative insights into the economic costs of policy uncertainty and delayed climate action in a non-cooperative world.

Presented at: CEMA Annual Meeting, Second Workshop on “Macroeconomic Perspectives on Climate Change” (University of Freiburg), QFAS Workshop (Tilburg University), Environmental Economics Seminar (Tilburg University)

This project aims to analyze the interaction between physical climate risk and credit risk in an international economy. Countries have access to an international capital market, where they can emit bonds and trade bonds of other countries. We study how market frictions such as borrowing constraints can become binding after a climate-related disasters and determine optimal carbon taxes under those constraints.

This paper analyzes the optimal portfolio and consumption decisions of a household facing energy price shocks. The household can respond to energy price volatility through two channels: reducing energy consumption or investing in energy-efficient home renovations. The household must balance immediate consumption needs, long-term investment objectives, and energy expenditures while managing uncertainty in energy prices. Our results show how energy price risk, house price risk, and biometric risk affect household portfolio composition and identify conditions under which energy efficiency investments become optimal. The model provides insights into household behavior under energy price uncertainty and has implications for policy design aimed at promoting energy conservation and residential energy efficiency improvements.

Presented at: Finance Brown Bag Seminar (Maastricht University), Finance Seminar (University of Konstanz)

This paper examines optimal insurance and adaptation decisions of households facing physical climate risks in the form of flood events. We develop a stochastic control problem in which households must balance consumption, portfolio allocation, and risk management strategies when exposed to flood risk. The household can purchase flood insurance to transfer risk and invest in property to repair damages. We characterize optimal decision rules for insurance coverage, repair timing, and investment choices under uncertainty about flood frequency and severity. The results show that flood risk significantly affects household wealth accumulation and portfolio composition. These findings have implications for insurance market design and understanding household behavior in response to escalating physical climate risks.

Presented at: QFAS Workshop (Tilburg University)

In this study, we examine the effects of delays and cost overruns that frequently accompany the supply of public infrastructure in a rising economy. Our findings imply that uncertainty regarding the arrival of public funding can more than outweigh its beneficial productivity spillovers to the private sector. Unanticipated delays in the distribution of public capital cause excessive consumption and insufficient private investment in a decentralized economy, relative to the first-best optimal. In the presence of delays in the supply of public goods, a social planner allocates more resources to private investment and fewer resources to consumption, relative to the first-best outcome in the canonical model (without delays). In addition to reducing equilibrium growth, the existence of delays results in a divergent growth path relative to that predicted by the standard model. This shows that delays in public capital provision may be a possible cause of income and economic development disparities between nations.

Permanent Working Papers (available for download from SSRN)

PDE Solver

I have developed a Matlab solver for parabolic (and elliptic) partial differential equations, which are common in finance and economics. As an example, the solver can determine the value function in an endowment economy with recursive preferences of the Epstein-Zin type leading to semi-linear PDEs, and can handle consumption plus two continuous state variables driven by Brownian and Poissonian shocks, as well as two (directed or undirected) Markov chains. Similarly, it can be applied to option pricing solving parabolic PDEs of the Black-Scholes type. Moreover, it can easily be extended to Hamilton-Jacobi-Bellman equations and more involved state variable dynamics. If you are interested in the solver, please get in touch with me.