Contagious risk: Nexus of risk in climate, epidemic, geopolitics, and economic

Abstract

In recent years, “black swan” events have increasingly occurred across climate, epidemics, geopolitics, and economics, leading to a gradual coupling of different types of risk. Different from isolated shocks as a single type of risk affecting a specific industry, a nexus of risks allows one risk area to quickly relate to others, resulting in more catastrophic impacts. Utilizing an integrated framework, we investigate the contagion effects among climate policy uncertainty, the infectious disease equity market volatility tracker, geopolitical risk, and economic policy uncertainty using volatility, skewness, and kurtosis as risk measures. The results indicate that: (1) The contagion effect of different types of risk increases with higher order risk measures, suggesting that more extreme events are more likely to be contagious across domains. (2) Approximately two‐thirds of risk contagion occurs contemporaneously, while about one‐third occurs with a lag, indicating that risk contagion combines both immediacy and continuity. (3) Risk contagion exhibits significant time‐varying and heterogeneous characteristics. Our study elucidates the inherent contagion characteristics between different types of risk, transforming the understanding of risk from a one‐dimensional to a multidimensional perspective. This underscores that risk management should not be confined to a single domain; it is crucial to consider the potential impacts of risks from other industries on one's own.