Climate risks and U.S. stock‐market tail risks: A forecasting experiment using over a century of data

Abstract

We examine the predictive value of the uncertainty associated with growth in temperature for stock-market tail risk in the United States using monthly data that cover the sample period from 1895:02 to 2021:08. To this end, we measure stock-market tail risk by means of the popular Conditional Autoregressive Value at Risk (CAViaR) model.Our results show that accounting for the predictive value of the uncertainty associated with growth in temperature, as measured either by means of standard generalized autoregressive conditional heteroskedasticity (GARCH) models or a stochastic-volatility (SV) model, mainly is beneficial for a forecaster who suffers a sufficiently higher loss from an underestimation of tail risk than from a comparable overestimation.

Climate Risks and Stock Market Volatility over a Century in an Emerging Market Economy: The Case of South Africa

“…However, researchers thus far have not incorporated the role of changes in the temperature anomaly and its volatility capturing climate-based rare disaster risks in forecasting stock return volatility in South Africa spanning over a century of historical equity market data. In fact, in earlier studies on climate risks and stock markets, researchers primarily have concentrated on developed countries and on in-sample movements of the first moment [13,15,27,29,30], with the only exception being [14], who have analyzed stock market volatility of the state-level data in the United States (US). When it comes to volatility, the literature thus far has concentrated on predicting second moments of commodity returns due to climate risks (for example, [58][59][60][61][62][63]).…”

“…Our objective is to forecast stock return volatility of an important emerging market economy, namely South Africa, using the informational content of rare disaster risk, over the monthly period from February 1910 to February 2023. In line with the burgeoning literature on climate finance, we use changes in the temperature anomaly and its volatility as an empirical proxy of the theoretical concept of rare disaster risk, as in the advanced financial market movements-based research by [11][12][13][14][15], given that climate change poses a large aggregate risk to the overall macroeconomy and the global financial system due to the associated occurrences of rare disasters originating from physical risks involved with global warming and climate change [16][17][18]. To this end, we study data that span more than a century because climate change is a slow-moving process and its effects have tended to aggravate over time as economies have become more and more industrialized.…”

Effect of Climate Action on Renewable Energy Stock Price

“…This responsibility connects governments that make public policy decisions and policies, organisations (profit and non-profit) that play advocacy role regarding climate change initiative and stock exchange markets where corporate stocks are sold. This is important because the financial sector of the economy is affected directly or indirectly by the risks of climate change (Salisu et al, 2023;Zhou et al, 2023).…”