Systemic risk effects of climate transition on financial stability

Javier Ojea-Ferreiro, Juan Reboredo and Andrea Ugolini

International Review of Financial Analysis, 2024, vol. 96, issue PB

Abstract: We assess how climate transition risk, through its effects on asset prices, could impact financial stability. Using copula functions, we characterize the conditional distribution of financial firm returns under different climate-related market scenarios. We account for average and tail effects of climate transition scenarios on the value of financial firms using three systemic risk metrics: climate transition expected returns, climate transition value-at-risk, and climate transition expected shortfall. Empirical evidence indicates that European banks experience the highest systemic impacts from a disorderly transition, and that the cost of rescuing more risk-exposed financial firms from climate transition losses is relatively manageable.

Keywords: Climate risks; Financial stability; Systemic risk; Copulas (search for similar items in EconPapers)
JEL-codes: C32 C58 G01 G20 G28 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:96:y:2024:i:pb:s1057521924006549

DOI: 10.1016/j.irfa.2024.103722

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