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Assessing climate risk impact on financial markets: A GARCH-Wavelet-Spillover approach to green and traditional assets

Author

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  • Almajali, Awon
  • Almajali, Obada
  • Alqaralleh, Huthaifa

Abstract

This paper investigates climate risk, defined as physical (disasters) and transition (policy), on volatility spillover of green and traditional financial markets. We develop a novel framework incorporating GARCH-LSTM model wavelet decomposition and spillover indices to assess the evolution of these dynamics in short, medium and long-term horizons. The results indicate that transition risks create sharper reactions and more volatility transmissions that are more immediate. In the mid-term, they affect the economy and markets quite suddenly. In comparison, the effects of physical risks are more long-lasting in nature. Green assets react differently depending on the type and frequency of risk, which has cast doubt on their resilience. This study enhances our understanding of climate-finance links with a flexible tool for investors and policymakers facing uncertainty in a low-carbon transition by modelling risk heterogeneity and temporal connectedness jointly.

Suggested Citation

  • Almajali, Awon & Almajali, Obada & Alqaralleh, Huthaifa, 2026. "Assessing climate risk impact on financial markets: A GARCH-Wavelet-Spillover approach to green and traditional assets," The North American Journal of Economics and Finance, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:ecofin:v:84:y:2026:i:c:s1062940826000422
    DOI: 10.1016/j.najef.2026.102620
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