Abstract
In this chapter the mathematical framework developed in Chap. 2 is used to apply ROA in an area for which extensions of Black-Scholes or NPV cannot be used: fat tail distributions, i.e., areas in distributions where extreme events reside. This chapter paves the way to the policy discussion of the response to climate change, where such distributions are pervasive.
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Notes
- 1.
If β < 2, the distribution does not have even an average. And when 2 ≤ β < 3, the distribution has an average, but it does not have a variance. Both kinds of distributions have a mathematical raison d’être (Samorodnitsky Taqqu 1994).
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Morel, B. (2020). Extreme Events, Cat Bonds, ROA in the Context of Fat Tail Distributions, and the Weitzman Effect. In: Real Option Analysis and Climate Change. Springer Climate. Springer, Cham. https://doi.org/10.1007/978-3-030-12061-0_4
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