Can effects of weather variation predict future economic downturn? Evidence from systemic risk in Indian financial markets

Pratik Thakkar ()
Additional contact information
Pratik Thakkar: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: We examine how weather variation influences economic activity through its impact on systemic risk in financial markets, an underexplored channel for a developing economy like India. Using a semi-parametric generalized additive model, we analyze weather effects on monthly systemic risk data from 898 listed Indian firms from January 2005 to November 2022. Our findings confirm that weather variation significantly impacts Indian systemic risk. However, we observe that these effects are reliably estimated when we consider decomposed weather- expected and anomaly-instead of aggregate weather variables. We find that a rise in temperature (precipitation) increases (decreases) systemic risk. Unlike existing studies, this paper highlights that the impact is more pronounced when we observe a rise in weather anomaly compared to its expected counterpart. Moreover, these weather effects vary across seasons and broad industry clusters. Supply chain disruptions, energy demand shifts, and credit supply constraints emerge as key mechanisms linking weather fluctuations to systemic risk. Finally, we show that weather-related systemic risk can predict future economic downturns, offering early warning signs for climate risk management.

Keywords: Weather; Systemic risk; Forecast; Generalized additive models; India (search for similar items in EconPapers)
JEL-codes: C14 E32 G10 O53 Q54 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2025-03
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.igidr.ac.in/pdf/publication/WP-2025-006.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2025-006

Access Statistics for this paper

More papers in Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India Contact information at EDIRC.
Bibliographic data for series maintained by Shamprasad M. Pujar ().