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Systemic risk effects of climate transition on financial stability

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  • Ojea-Ferreiro, Javier
  • Reboredo, Juan C.
  • Ugolini, Andrea

Abstract

We assess how climate transition risk, through its effects on asset prices, could impact financial stability. Using copula functions, we characterize the conditional distribution of financial firm returns under different climate-related market scenarios. We account for average and tail effects of climate transition scenarios on the value of financial firms using three systemic risk metrics: climate transition expected returns, climate transition value-at-risk, and climate transition expected shortfall. Empirical evidence indicates that European banks experience the highest systemic impacts from a disorderly transition, and that the cost of rescuing more risk-exposed financial firms from climate transition losses is relatively manageable.

Suggested Citation

  • Ojea-Ferreiro, Javier & Reboredo, Juan C. & Ugolini, Andrea, 2024. "Systemic risk effects of climate transition on financial stability," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    • Handle: RePEc:eee:finana:v:96:y:2024:i:pb:s1057521924006549
    DOI: 10.1016/j.irfa.2024.103722
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    More about this item

    Keywords

    Climate risks; Financial stability; Systemic risk; Copulas;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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