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Can Variations in Temperature Explain the Systemic Risk of European Firms?

Author

Listed:
  • Panagiotis Tzouvanas

    (University of Sussex
    University of Portsmouth)

  • Renatas Kizys

    (University of Southampton)

  • Ioannis Chatziantoniou

    (University of Portsmouth)

  • Roza Sagitova

    (University of Portsmouth)

Abstract

We employ a $$\varDelta CoVaR$$ΔCoVaR model in order to measure the potential impact of temperature fluctuations on systemic risk, considering all companies from the STOXX Europe 600 Index, which covers a wide range of industries for the period from 1/1/1990 to 29/12/2017. Furthermore, in this study, we decompose temperature into 3 factors; namely (1) trend, (2) seasonality and (3) anomaly. Findings suggest that, temperature has indeed a significant impact on systemic risk. In fact, we provide significant evidence of either positive or nonlinear temperature effects on financial markets, while the nonlinear relationship between temperature and systemic risk follows an inverted U-shaped curve. In addition, hot temperature shocks strongly increase systemic risk, while we do witness the opposite for cold shocks. Additional analysis shows that deviations of temperature by $$1\,^{\circ }\hbox {C}$$1∘C can increase the daily Value at Risk by up to 0.24 basis points. Overall, higher temperatures are highly detrimental for the financial system. Results remain robust under the different proxies that were employed to capture systemic risk or temperature.

Suggested Citation

  • Panagiotis Tzouvanas & Renatas Kizys & Ioannis Chatziantoniou & Roza Sagitova, 2019. "Can Variations in Temperature Explain the Systemic Risk of European Firms?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(4), pages 1723-1759, December.
  • Handle: RePEc:kap:enreec:v:74:y:2019:i:4:d:10.1007_s10640-019-00385-0
    DOI: 10.1007/s10640-019-00385-0
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    More about this item

    Keywords

    Conditional Value at Risk; Systemic risk; Climate change; Temperature;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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