The propagation effect of climate risks on global stock markets: Evidence from the time and space domains

Yin, Libo; Cao, Hong

doi:10.1016/j.eneco.2024.107445

Cited by 4 publications

(2 citation statements)

References 28 publications

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“…There is a growing concern among financial participants regarding the influence of climate change on the pricing of financial assets. Previous studies have demonstrated that climate risk exerts a discernible impact on financial assets (Dietz et al 2016, Battiston et al 2017, Javadi and Masum 2021, Zhang et al 2023, Yin and Cao 2024. In this paper, among the various natural disasters caused by climate change, we focus on drought risk, which is known for its devastating impact on economic activities (Lesk et al 2016, Naumann et al 2021, Sharma and Sen 2021, Shahpari et al 2022, Rahman et al 2023.…”

Section: Introductionmentioning

confidence: 99%

“…While the majority of existing research shows the negative impact of drought on economies at the global or European country level (Lesk et al 2016, Hong et al 2019, Naumann et al 2021, Yin and Cao 2024, few studies (Do et al 2020, Huynh et al 2020 have focused on the US market. Analyzing the impact of drought on stock markets within the U.S., rather than on a global scale, allows for a more controlled comparison, as it minimizes confounding economic variables such as inflation, GDP growth rates, and fiscal policies that differ across countries.…”

Section: Introductionmentioning

confidence: 99%

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Drought and energy stock markets in the United States

Kim,

Jeon,

Kim

2024

Environ. Res. Lett.

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Amid increasing concerns about the impact of climate change on financial asset pricing, this paper investigates how drought risk affects stock returns in the U.S. energy sector over a thirty-year period (1990-2019). To this end, we ranked energy companies based on the long-term trend of the Palmer Drought Severity Index (PDSI) to compare stock performance between groups experiencing the most significant increases and decreases in drought risk. Our analysis indicates that firms located in drought-prone regions have lower stock returns than those in regions with decreasing drought risk, particularly since 2010. This finding is noteworthy, as the average PDSI trend gap between regions at high risk of drought and those at low risk has widened during this period. We further divide our sample of energy companies into two subsectors—fuel production and electric utility—and find that the stock prices of both subsectors have been negatively affected by drought risk since 2010. The study underscores the energy sector's dependency on water availability, suggesting novel implications for policymakers and investors in assessing the financial impacts of drought risks in their climate-related decision-making.

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