Climate Risk Disclosures and Cross-Sectors Return and Risk Spillovers in Stock Market: Evidence from the Us and China

Abstract

This research utilizes advanced textual mining methodologies to systematically extract and analyze climate risk disclosure data from publicly traded companies within 11 key industries in China and the United States over the period 2016-2022. The empirical findings of this study underscore the substantial impact that elevated levels of climate risk disclosures within industries have on the network centrality parameters of returns, volatility, and extreme risks in stock markets. Our analysis reveals that increased transparency in climate risk reporting not only enhances return efficiency within individual industries but also significantly influences their capacity to affect returns across other sectors, as evidenced in measures like weighted degree centrality, weighted in-degree centrality, weighted out-degree centrality, weighted closeness centrality, local efficiency, and harmonic centrality. The study delineates that improved climate risk disclosure practices contribute to aligning a sector’s volatility with that of related sectors and the wider market, thereby bolstering resilience against market fluctuations and enhancing the sector’s capability to insulate itself from external sectoral influences. Critically, the research illustrates that a comprehensive approach to climate risk disclosures can effectively mitigate the risk of stock price crashes within a sector, which, in turn, significantly influences the interconnected network comprising returns, volatility, and extreme risks. This intricate relationship highlights the imperative for continuous regulatory oversight of climate risk disclosures and associated stock price crash risks. Such monitoring is essential to effectively manage the propensity for risk spillover within industries. The insights derived from this study are instrumental for shaping strategic risk management approaches and for informing the development of regulatory policies focused on reinforcing the stability and resilience of financial markets.

Keywords: Climate risk disclosures, Risk spillover networks, Sector node centrality, Stock price cash risk, Text mining