Climate Stress Testing

Viral Acharya, Richard Berner, Robert Engle, Hyeyoon Jung, Johannes Stroebel, Xuran Zeng and Yihao Zhao

No 31097, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We explore the design of climate stress tests to assess and manage macro-prudential risks from climate change in the financial sector. We review the climate stress scenarios currently employed by regulators, highlighting the need to (i) consider many transition risks as dynamic policy choices; (ii) better understand and incorporate feedback loops between climate change and the economy; and (iii) further explore “compound risk” scenarios in which climate risks co-occur with other risks. We discuss how the process of mapping climate stress scenarios into financial firm outcomes can incorporate existing evidence on the effects of various climate-related risks on credit and market outcomes. We argue that more research is required to (i) identify channels through which plausible scenarios can lead to meaningful short-run impact on credit risks given typical bank loan maturities; (ii) incorporate bank-lending responses to climate risks; (iii) assess the adequacy of climate risk pricing in financial markets; and (iv) better understand and incorporate the process of expectations formation around the realizations of climate risks. Finally, we discuss the relative advantages and disadvantages of using market-based climate stress tests that can be conducted using publicly available data to complement existing stress testing frameworks.

JEL-codes: G0 Q0 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-agr, nep-ban and nep-env
Note: AP CF EEE EFG ME
References: Add references at CitEc
Citations: View citations in EconPapers (15)

Published as Viral V. Acharya & Richard Berner & Robert Engle & Hyeyoon Jung & Johannes Stroebel & Xuran Zeng & Yihao Zhao, 2023. "Climate Stress Testing," Annual Review of Financial Economics, vol 15(1).

Downloads: (external link)
http://www.nber.org/papers/w31097.pdf (application/pdf)

Related works:
Journal Article: Climate Stress Testing (2023)
Working Paper: Climate Stress Testing (2023)
Working Paper: Climate Stress Testing (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:31097

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w31097

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().