When climate extremes shake equity markets: Evidence from multifractal analysis

Extreme climate events (ECEs) are intensifying with climate change, yet how these shocks are incorporated into asset prices remain unexplored. This paper investigates whether climate extremes impact equity market efficiency. Using daily data from US and Brazilian stock indices – both aggregate and sectoral – over 2000–2025, we apply multifractal detrended fluctuation analysis to track time-varying multifractality as a proxy for efficiency. The findings reveal a counterintuitive pattern: multifractality decreases during ECEs, implying weaker nonlinear dependencies and greater randomness in returns. ECEs act as salient shocks that draw investors’ attention and trigger belief updating. Investors overweight the extreme event, revise expectations in a more similar direction, and converge toward aligned trading horizons, which compresses the heterogeneity of temporal trading scales and, consequently, reduces multifractality (higher efficiency). This effect is most evident at the aggregate market level, but sectoral indices, particularly in energy and materials, also display sensitivity to ECEs. These results carry practical relevance for asset pricing and risk management, suggesting that investors and policymakers can leverage such patterns to improve portfolio allocation and resilience under climate stress.