IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp2326.html
   My bibliography  Save this paper

Bounding the Impact of Hazard Interdependence on Climate Risk

Author

Listed:
  • Linda Isabella Hain

    (University of Zurich - Department of Banking and Finance)

  • Julian Koelbel

    (University of St. Gallen)

  • Markus Leippold

    (University of Zurich; Swiss Finance Institute)

Abstract

The severity of extreme weather events is increasing due to climate change, giving rise to physical climate risk. However, physical climate risk is not only driven by the severity of individual hazards, but also by the interdependence of those hazards. This paper establishes bounds for the impact of interdependence on the Expected Shortfall for a portfolio of damages from 13 weather hazards, namely Avalanche, Cold, Dust Storm, Flood, Fog, Hail, Heavy Rain, High Winds, Hurricane, Ice/Snow, Landslide, Tornado, and Wildfire. We empirically estimate the tail risk of multi-hazard portfolios for the limiting cases of independence and perfect dependence, relying on data from NOAA’s Storm Events Database from 1996 to 2021. We apply the extreme value theory approach of Cirillo and Taleb (2016) to calculate the Expected Shortfall. We find that assuming perfect dependence instead of independence increases the Expected Shortfall by 3.6% to 66.5% for a portfolio with equally weighted exposure to all 13 hazards, and by a factor of 1.44 to 7.06 for a risk-weighted portfolio.

Suggested Citation

  • Linda Isabella Hain & Julian Koelbel & Markus Leippold, 2023. "Bounding the Impact of Hazard Interdependence on Climate Risk," Swiss Finance Institute Research Paper Series 23-26, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2326
    as

    Download full text from publisher

    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4428724
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Victor Cardenas, 2024. "Financial climate risk: a review of recent advances and key challenges," Papers 2404.07331, arXiv.org.

    More about this item

    Keywords

    Extreme Risks; Natural Catastrophes; Climate Change; Tail Risk; Dependence Uncertainty; Infinite Mean; Physical Climate Risk; Expected Shortfall;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp2326. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.