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Predicting the Conditional Distribution of US Stock Market Systemic Stress: The Role of Climate Risks

Author

Listed:
  • Massimiliano Caporin

    (Department of Statistical Sciences, University of Padova, Via Cesare Battisti 241, 35121 Padova, Italy)

  • Petre Caraiani

    (Institute for Economic Forecasting, Romanian Academy, Romania; Bucharest University of Economic Studies,Romania)

  • Oguzhan Cepni

    (Copenhagen Business School, Department of Economics, Porcelaenshaven 16A, Frederiksberg DK-2000, Denmark; Ostim Technical University, Ankara, Turkiye)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

Abstract

This paper explores how climate risks impact the overall systemic stress levels in the United States (US). We initially apply the TrAffic Light System for Systemic Stress (TALIS) approach that classifies the stock markets across all 50 states based on their stress levels, to create an aggregate stress measure called ATALIS. Then, we utilize a nonparametric causality-in-quantiles approach to thoroughly assess the predictive power of climate risks across the entire conditional distribution of ATALIS, accounting for any data nonlinearity and structural changes. Our analysis covers daily data from July 1996 to March 2023, revealing that various climate risk indicators can predict the entire conditional distribution of ATALIS3, particularly around its median. The full-sample result also carries over time, when the nonparametric causality-in-quantiles test is conducted based on a rolling-window. Our findings, showing that climate risks are positively associated with ATALIS over its entire conditional distribution, provide crucial insights for investors and policymakers regarding the economic impact of environmental changes.

Suggested Citation

  • Massimiliano Caporin & Petre Caraiani & Oguzhan Cepni & Rangan Gupta, 2024. "Predicting the Conditional Distribution of US Stock Market Systemic Stress: The Role of Climate Risks," Working Papers 202407, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202407
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    References listed on IDEAS

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    More about this item

    Keywords

    State stock markets; Systemic stress; Climate risks; Quantile predictions;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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