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Predicting the Conditional Distribution of Risk Aversion The Role of Climate Risks in a Cross-Quantilogram Framework

Author

Listed:
  • Abeeb Olaniran

    (Department of Economics, University of Pretoria, South Africa)

  • David Gabauer

    (Department of Financial and Business Systems, Lincoln University, New Zealand)

  • Rangan Gupta

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

  • Onur Polat

    (Department of Public Finance, Bilecik Seyh Edebali University, Turkey)

Abstract

Climate-related risks have become a growing source of market disruption, with potential behavioral implications for investor decision-making. This study investigates whether and how climate risks influence risk aversion among market participants. Using a quantilogram approach, we examine the predictive power of different climate risk measures, covering both physical and transition risks, for a behavioral proxy of investor risk aversion. The analysis yields three key findings. First, climate risks significantly increase risk aversion, particularly in the lower and median quantiles of climate risk and the upper quantiles of risk aversion. Second, physical risks exert a stronger influence than transition risks, with global warming and U.S. climate-related policy uncertainty emerging as the most impactful within their respective categories. Third, the observed effects remain robust after controlling for other sources of macroeconomic and financial uncertainty. These findings suggest that climate risks can dampen investor risk appetite, a result with important implications for financial market stability and the design of disaster-related financial policy interventions.

Suggested Citation

  • Abeeb Olaniran & David Gabauer & Rangan Gupta & Onur Polat, 2025. "Predicting the Conditional Distribution of Risk Aversion The Role of Climate Risks in a Cross-Quantilogram Framework," Working Papers 202524, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202524
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    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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