Can Variations in Temperature Explain the Systemic Risk of European Firms?

Panagiotis Tzouvanas (), Renatas Kizys (), Ioannis Chatziantoniou and Roza Sagitova ()
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Panagiotis Tzouvanas: University of Sussex
Renatas Kizys: University of Southampton
Roza Sagitova: University of Portsmouth

Environmental & Resource Economics, 2019, vol. 74, issue 4, No 10, 1723-1759

Abstract: Abstract We employ a $$\varDelta CoVaR$$ΔCoVaR model in order to measure the potential impact of temperature fluctuations on systemic risk, considering all companies from the STOXX Europe 600 Index, which covers a wide range of industries for the period from 1/1/1990 to 29/12/2017. Furthermore, in this study, we decompose temperature into 3 factors; namely (1) trend, (2) seasonality and (3) anomaly. Findings suggest that, temperature has indeed a significant impact on systemic risk. In fact, we provide significant evidence of either positive or nonlinear temperature effects on financial markets, while the nonlinear relationship between temperature and systemic risk follows an inverted U-shaped curve. In addition, hot temperature shocks strongly increase systemic risk, while we do witness the opposite for cold shocks. Additional analysis shows that deviations of temperature by $$1\,^{\circ }\hbox {C}$$1∘C can increase the daily Value at Risk by up to 0.24 basis points. Overall, higher temperatures are highly detrimental for the financial system. Results remain robust under the different proxies that were employed to capture systemic risk or temperature.

Keywords: Conditional Value at Risk; Systemic risk; Climate change; Temperature (search for similar items in EconPapers)
JEL-codes: C21 C33 G32 Q54 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s10640-019-00385-0

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