Climate Risk and Financial Systems: A Nonlinear Network Connectedness Analysis

45 Pages Posted: 14 Feb 2023

See all articles by Xiaodan Mao

Xiaodan Mao

Changsha University of Science & Technology; Central South University

Ping Wei

Central South University

Xiaohang Ren

University of Southampton

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Abstract

This paper investigates the effect of climate risk on systemic financial risks by employing the network approach. Our results demonstrate that climate risk not only affects a single financial market, but also induces risk co-movement, which aggravates potential systemic financial risks. More specifically, we find that while the forex and commodity markets appear to be usually more sensitive to climate-related information, the bond and stock markets play a crucial role in transmitting climate risk. In addition, the vulnerability of financial asset price fluctuations to climate risk changes substantially over time. Quantile regressions reveal the positive impact of climate risk on total connectedness across the financial system. Our study provides novel insight into how the financial system responds to climate-related information and how systemic risk dynamics materialize.

Keywords: Climate change, Climate risk, Systemic risk, Network estimation, Vector autoregression, Variance decomposition

Suggested Citation

Mao, Xiaodan and Wei, Ping and Ren, Xiaohang, Climate Risk and Financial Systems: A Nonlinear Network Connectedness Analysis. Available at SSRN: https://ssrn.com/abstract=4358483 or http://dx.doi.org/10.2139/ssrn.4358483

Xiaodan Mao

Changsha University of Science & Technology ( email )

China

Central South University ( email )

Ping Wei

Central South University ( email )

Xiaohang Ren (Contact Author)

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

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