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Climate risk and predictability of global stock market volatility

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  • Zhou, Mingtao
  • Ma, Yong

Abstract

This study examines the informative role of climate risk in improving the predictability of global stock market volatility. By aggregating four climate risk proxies of Faccini et al. (2023), relating to physical climate impacts and climate mitigation actions, we reveal that aggregate climate risk is a significantly positive predictor of stock volatility across 32 international markets. This predictability persists in out-of-sample tests and cannot be subsumed by relevant economic and financial uncertainty measures. However, the predictive power of aggregate climate risk exhibits noteworthy variations over time and across regions; it weakens when economic conditions deteriorate, whereas it strengthens following the Paris Agreement and in regions with advanced financial development, high energy intensity, and strong climate change readiness. Moreover, by dissecting the multiple facets of climate risk, we show that physical risks, especially natural disasters, have much stronger predictability than transition risks. These predictive insights offer valuable guidance for risk management, policy planning, and the adjustment of asset pricing models in response to the evolving global climate risk landscape.

Suggested Citation

  • Zhou, Mingtao & Ma, Yong, 2025. "Climate risk and predictability of global stock market volatility," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:intfin:v:101:y:2025:i:c:s1042443125000253
    DOI: 10.1016/j.intfin.2025.102135
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    1. Ruizhi Liu & Jiajia Li & Mark Wu, 2025. "The Impact of Climate Change Risk on Corporate Debt Financing Capacity: A Moderating Perspective Based on Carbon Emissions," Sustainability, MDPI, vol. 17(14), pages 1-37, July.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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