Climate change and currency returns

Ilias Filippou, Mark P. Taylor and Taizhi Wu

Chapter 12 in Handbook of Climate Change and Financial Markets, 2026, pp 217-237 from Edward Elgar Publishing

Abstract: This chapter examines the cross-sectional predictive power of climate change variables for currency returns. Using 69 environmental variables, we develop a novel currency investment strategy by applying machine learning techniques to predict currency returns. Our findings show that currencies from high-risk countries yield higher returns, reflecting a climate risk premium, while low-risk currencies offer lower returns. Key predictors include nuclear production, cement CO2 equivalents emissions, and internal carbon price per ton. The strategy achieves an annualized return of 2.67% with a Sharpe ratio of 0.20, demonstrating the presence of climate risk premia in currency markets. It also performs well during crises such as the 2008–2009 financial crisis, highlighting the growing relevance of climate risks in financial markets and investment decisions.

Keywords: Climate change; Foreign exchange market (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035340415
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