Climate risk and predictability of global stock market volatility

Mingtao Zhou and Yong Ma

Journal of International Financial Markets, Institutions and Money, 2025, vol. 101, issue C

Abstract: This study examines the informative role of climate risk in improving the predictability of global stock market volatility. By aggregating four climate risk proxies of Faccini et al. (2023), relating to physical climate impacts and climate mitigation actions, we reveal that aggregate climate risk is a significantly positive predictor of stock volatility across 32 international markets. This predictability persists in out-of-sample tests and cannot be subsumed by relevant economic and financial uncertainty measures. However, the predictive power of aggregate climate risk exhibits noteworthy variations over time and across regions; it weakens when economic conditions deteriorate, whereas it strengthens following the Paris Agreement and in regions with advanced financial development, high energy intensity, and strong climate change readiness. Moreover, by dissecting the multiple facets of climate risk, we show that physical risks, especially natural disasters, have much stronger predictability than transition risks. These predictive insights offer valuable guidance for risk management, policy planning, and the adjustment of asset pricing models in response to the evolving global climate risk landscape.

Keywords: Aggregate climate risk; Physical risk; Transition risk; Volatility predictability; International evidence; Temporal and regional heterogeneity (search for similar items in EconPapers)
JEL-codes: G12 G15 G17 Q54 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:101:y:2025:i:c:s1042443125000253

DOI: 10.1016/j.intfin.2025.102135

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