Climate Transition Risks and the Energy Sector, with Viral
Acharya, Stefano Giglio, Stefano Pastore, Johannes
Stroebel and Zhenhao Tan. Revise and Resubmit in the Review of
Financial Studies.
[+] Abstract
We build a general equilibrium model to study how climate transition risks affect
energy prices and the valuations of different firms in the energy sector. We consider two types of fossil
fuel firms: incumbents that have developed oil reserves they can extract today or tomorrow, and new entrants
that must invest in exploration and drilling today to have reserves to potentially extract tomorrow. There
are also renewable energy firms that produce emission-free energy but cannot currently serve
non-electrifiable sectors of the economy. We analyze three sources of climate transition risk: (i) changes
in the probability of a technological breakthrough that allows renewable energy firms to serve all economic
sectors; (ii) changes in expected future taxes on carbon emissions; and (iii) restrictions on today's
development of additional fossil fuel production capacity. We show that different transition risks—and,
importantly, uncertainty about their realizations—have distinct effects on firms' decisions, on their
valuations, and on equilibrium energy prices. We provide empirical support for the heterogeneous effects of
different transition risks on energy prices and stock returns of firms in different energy
sub-sectors.
Mechanisms of Contagion in Financial Networks,
my undergraduate thesis, advised by Prof. Leonie Baumann.
[+] Abstract
I develop a multi-sector core–periphery model of the banking system with correlated
portfolios between counterparties and study how a sector-specific shock propagates through bilateral exposures
and common asset holdings. I use this to show how the relative importance of interbank and fire-sale contagion
depends on the size of the shock and characteristics of the financial network and markets. I first derive
explicit thresholds at which different groups of banks default as the shock grows and decompose systemic
losses at each threshold into interbank and fire-sale components. I then calibrate the model in a simple
multi-sector example and simulate the response to shocks of increasing size, showing that small shocks are
amplified mainly through interbank linkages, while large shocks are amplified mainly through fire-sale
spillovers once core institutions are affected. Finally, I perform comparative statics that vary key features
of the system—such as network structure, portfolio concentration, and market depth—and map them into the
interbank share of contagion at each default threshold.