Does Climate Risk Amplify Oil Market Volatility?

Abstract

Motivated by the increasing evidence of oil price-related transition risk from climate change, we employ the classic GARCH (1,1) and its extended variant (GARCH-X) to identify the degree of oil market volatility that is due to climate risk. We find that climate risk increases the persistence of volatility in the oil markets.

Climate Change, Technology Shocks and the US Equity Real Estate Investment Trusts (REITs)

“…In other words, higher risks, aggravated by climate change, in the equity REIT market, limit the trading potential in the market since investors are sometimes more concerned about market stability than the return itself. Our results buttress the existing findings in the literature that stock market volatility significantly responds to climate uncertainty [44]; climate risk increases the persistence of volatility in the oil market [45] and that temperature is a source of long-run economic risk [46]. Our results thus indicate that the housing and estate industry is not exempted from the heat of the campaign against carbon emission and ozone layer depletion, owing fairly to the nature of technologies required in this industry, and the deforestation that usually accompanies the erection of a building, among others.…”

“…The effects of climate change on return volatility of the US mortgage REITs (as shown in Table 7) are similar to those reported in Table 3 in that they reveal that climate change, as measured by temperature anomaly, not only heightens the volatility (or risk) associated with US mortgage REITs due to the positive relationship (as indicated by the slope coefficient) (see also [45][46][47]), but that it also contains some important information necessary for predicting future mortgage REITs' outcomes. This latter conclusion is supported by the significance of our slope coefficient, particularly when the RV-based model is taken into account, and the temperature is 25 degrees higher.…”