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Physical climate risk, fund holdings, and idiosyncratic risk

Author

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  • Zhang, Lei
  • Sun, Shanghong

Abstract

This study explores how physical climate risk affects idiosyncratic risk and analyzes the moderating role of firms' fund holding structure in this process. This study covers the period from 2001 to 2023, constructing a panel dataset with monthly temperature frequency based on Chinese A-share listed companies. We calculate an idiosyncratic volatility index using the residuals of capital asset pricing, three-factor, and five-factor models. The results reveal that temperature changes are significantly positively correlated with firm-specific risk. Even under nonextreme weather conditions, high temperatures can significantly increase idiosyncratic risk, particularly in the manufacturing industry. We also find that firms with a higher proportion of fund holdings have more obvious idiosyncratic risks under temperature fluctuations. This study provides a new perspective for understanding the relationship between physical climate risk and firm risk, enriching climate finance research from the perspective of firms' holding structure.

Suggested Citation

  • Zhang, Lei & Sun, Shanghong, 2025. "Physical climate risk, fund holdings, and idiosyncratic risk," International Review of Financial Analysis, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:finana:v:103:y:2025:i:c:s1057521925002704
    DOI: 10.1016/j.irfa.2025.104183
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