Dynamic Impacts of Climate Risks on Spillovers Between Cryptocurrency and Precious Metals Markets: A Comparative Analysis Pre and During the COVID-19 Pandemic

This paper explores how climate risks affect the spillover between cryptocurrency and precious metals markets, given the increased interplay between climate-related threats and financial markets. The dynamic spillovers of the cryptocurrency and precious metals markets are analyzed initially by the TVP-VAR-DY model. Subsequently, it investigates how transition risk and physical risk affect these spillovers using quantile Granger causality (QGC), quantile–quantile regression (QQR), and wavelet quantile regression (WQR), with a particular focus on the differences in the results across the pre- and during-COVID-19 periods. The results show that climate risks significantly affect the spillovers in the cryptocurrency and precious metals markets, and these effects are heterogeneous in nature. Specifically, it is found that, under normal market conditions, both TRI and PRI have the effect of strengthening the spillovers. However, in extreme market states, their influences weaken because of investor distraction. In addition, at extremely low levels of climate risk, both TRI and PRI tend to intensify spillovers, and the impact of PRI is more pronounced. Moreover, during the COVID-19 crisis, climate risks seemed to have a limited effect in the short run, while they were more sustainable in the long run. These findings offer crucial implications for mitigating climate-related systemic risks and fostering a resilient, sustainable financial ecosystem amidst global decarbonization efforts.