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Adverse Selection and Climate Risk: A Response to Ouazad and Kahn (2022)

Author

Listed:
  • Michael LaCour-Little
  • Andrey Pavlov
  • Susan Wachter

Abstract

We identify two issues in the work of Ouazad and Kahn (2022). Correcting either reverses the original result. The two changes are to use the correct FHFA conforming loan limits for each county and year and to compare the individual loan amount to that limit correctly. There is no evidence that lenders transfer climate risk by altering loan origination and securitization behavior. None of our results calls into question the value and importance of the O&K model as a test for adverse selection. The question addressed and the setup of the test are important and should be replicated over time.

Suggested Citation

  • Michael LaCour-Little & Andrey Pavlov & Susan Wachter, 2024. "Adverse Selection and Climate Risk: A Response to Ouazad and Kahn (2022)," The Review of Financial Studies, Society for Financial Studies, vol. 37(6), pages 1831-1847.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:6:p:1831-1847.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad072
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    More about this item

    Keywords

    G21; G28; R33;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets

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