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Systemic Financial Risks of Climate Shocks: Empirical Evidence from Major Free-Floating Currencies

Author

Listed:
  • Ilias Chiboub
  • Hicham Sadok

    (University Mohammed V, Rabat, Morocco)

Abstract

Using the Cumulative Average Abnormal Returns (CAAR) approach, we evaluate market reactions of major free-floating currencies (USD, JPY, EUR, GBP, CAD, CHF) to climate disasters. We further apply a Vector Autoregressive (VAR) model with impulse response functions and stress-testing to examine dynamic and persistent weather shocks. VAR-IRF and stress-tests results show temperature shocks affect EUR/USD and GBP/USD, causing sharp depreciations, while USD/JPY, USD/CAD, and USD/CHF are impacted via financial contagion. CAAR results suggest that emotionally charged disasters significantly weaken exchange rates, despite not being the most physically damaging. These findings distinguish immediate market volatility from dynamic responses to climate shocks.

Suggested Citation

  • Ilias Chiboub & Hicham Sadok, 2026. "Systemic Financial Risks of Climate Shocks: Empirical Evidence from Major Free-Floating Currencies," Working Papers hal-05731533, HAL.
    • Handle: RePEc:hal:wpaper:hal-05731533
    DOI: 10.2139/ssrn.6730843
    as

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