Predicting the Conditional Distribution of Risk Aversion The Role of Climate Risks in a Cross-Quantilogram Framework

Abeeb Olaniran, David Gabauer (), Rangan Gupta () and Onur Polat
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Abeeb Olaniran: Department of Economics, University of Pretoria, South Africa
David Gabauer: Department of Financial and Business Systems, Lincoln University, New Zealand
Rangan Gupta: Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa
Onur Polat: Department of Public Finance, Bilecik Seyh Edebali University, Turkey

No 202524, Working Papers from University of Pretoria, Department of Economics

Abstract: Climate-related risks have become a growing source of market disruption, with potential behavioral implications for investor decision-making. This study investigates whether and how climate risks influence risk aversion among market participants. Using a quantilogram approach, we examine the predictive power of different climate risk measures, covering both physical and transition risks, for a behavioral proxy of investor risk aversion. The analysis yields three key findings. First, climate risks significantly increase risk aversion, particularly in the lower and median quantiles of climate risk and the upper quantiles of risk aversion. Second, physical risks exert a stronger influence than transition risks, with global warming and U.S. climate-related policy uncertainty emerging as the most impactful within their respective categories. Third, the observed effects remain robust after controlling for other sources of macroeconomic and financial uncertainty. These findings suggest that climate risks can dampen investor risk appetite, a result with important implications for financial market stability and the design of disaster-related financial policy interventions.

Keywords: Climate-related risks; Quantilogram frameworks; Quantiles; Predictability; Risk aversion (search for similar items in EconPapers)
JEL-codes: C21 C22 G32 G41 Q54 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2025-07
New Economics Papers: this item is included in nep-upt
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