Extreme weather, climate risk, and the lead–lag role of carbon

Zhang-Hangjian Chen, Wei-Wei Chu, Xiang Gao, Kees G. Koedijk and Yaping Xu

Global Finance Journal, 2024, vol. 61, issue C

Abstract: This study employs the thermal optimal path method to establish a framework for dynamic nonlinear connections between Chinese carbon and foreign exchange markets. Subsequently, it examines the effects of extreme weather events on the lead–lag role played by carbon. The empirical results indicate that China's carbon market typically lags behind its currency exchange market. Compared to the Hubei carbon market, the Guangdong carbon market experiences synchronized price movements between carbon and foreign exchange due to high pricing efficiency. Furthermore, shocks from extreme weather events can attract public attention to the carbon market and cause the typical lead–lag structure to reverse, whereupon the carbon market leads the foreign exchange market under such shocks, especially during heat waves. Our findings have implications for investors aiming for positive cumulative returns on hedging portfolios and policymakers wishing to bolster the financial market's ability to withstand exogenous shocks.

Keywords: Carbon market; Foreign exchange market; Extreme weather risk; Lead–lag structure (search for similar items in EconPapers)
JEL-codes: C32 C50 F31 Q54 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:61:y:2024:i:c:s1044028324000462

DOI: 10.1016/j.gfj.2024.100974

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