Climate Change and Regional Systemic Risk in China

Abstract

In this study, we examine the relationship between climate change and regional systemic risk in China. Firstly, we construct the regional systemic risk measure to evaluate the systemic risk level for each city. Then we utilize the characteristics of the distribution of rainfalls and temperatures to identify the extreme weather events, and further explore the relationship between the regional systemic risk level and extreme weather. Our findings indicate that investors in China perceive extreme rainfalls and temperatures weather events differently. Specifically, we find that extreme rainy and cold weather events have positive impacts on the regional systemic risk, indicating that investors in China require a risk premium for these weathers. Additionally, we also implement the difference-in-difference approach, as well as panel event study to examine the role of government climate stances on investors’ beliefs. Our results suggest that an optimal climate policy may alleviate the regional systemic risk induced by climate change. Our study provides valuable insights into the regional systemic risk associated with climate change and emphasizes the role of expectation management in alleviating systemic risk in China.

Keywords: Climate change, Systemic risk, Extreme weather, Investors' belief