Climate risks and stock market volatility spillover: new insights from wavelet and causality methods

Yufeng Chen (), Simin Shen and Chuwen Wang
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Yufeng Chen: Capital University of Economics and Business
Simin Shen: Capital University of Economics and Business
Chuwen Wang: Zhejiang Normal University

Economic Change and Restructuring, 2025, vol. 58, issue 3, No 7, 32 pages

Abstract: Abstract Underlining the unprecedented rise in climate risks recently, it is crucial to assess the influence of climate risks on the volatility of the stock markets to maintain financial stability. This paper employs wavelet methods and discrete wavelet-based Granger causality tests to comprehensively analyze the complex details of volatility spillovers between climate risks and stock markets from 2013 to 2024. Meanwhile, a time-varying Granger causality test is applied to detect volatility relationships during major events. The outcomes reveal a discernible connection between climate risks and stock market volatility, with physical climate risk demonstrating notable associations with both short-term and long-term volatility, particularly in energy stock markets. The primary source of short- to midterm stock market fluctuations is transition risk, significantly impacting energy and total stock markets. The causal relationships are further heightened during major events. Notably, this study underscores the critical importance of monitoring physical climate risk, an essential contributor to transition risk and stock market volatility, which is currently underestimated by the market. These findings aim to provide valuable insights for policymakers and investors, aiding in informed risk avoidance and decision-making within the framework of climate change scenarios. Moreover, it emphasizes constructing comprehensive climate risk monitoring frameworks and corresponding incentive climate policies to manage the multi-domain interconnects between climate risks and stock markets.

Keywords: Climate change; Climate risk; Stock market volatility; Wavelet; Time-varying Granger causality test (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10644-025-09877-0

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