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Forecasting the effect of extreme sea-level rise on financial market risk

Author

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  • Garcia-Jorcano, Laura
  • Sanchis-Marco, Lidia

Abstract

The demand for modeling climate change and its effect on various affected financial and economic sectors is increasing. Sea-level rise is one of the major risks of climate change. Based on the global and regional mean sea level rise (MSLR), we propose extreme sea-level value at rise (ExSLVaR) and extreme sea-level expected rise (ExSLER) measures to forecast extreme MSLR calculated for the 10-day time series from eight seas/oceans from December 1992 to October 2020. Furthermore, we analyze the connection between different regional extreme MSLR measures (US, Europe, and Australia), used as proxies of climate risk, and financial market risk in several sectors. The main evidence shows that the different regional extreme MSLR measures forecast opposite effects, positive and negative, on financial and economic sectors over time, showing climate risk premium and cost, respectively. Specifically, the insurance sector presents the highest risk premium, and the oil and gas sector the highest risk cost. These measures are relevant for policymakers, regulators, and investors seeking strategies to mitigate future physical and transition risk while accounting for such risk in policies, regulations, and portfolio allocation.

Suggested Citation

  • Garcia-Jorcano, Laura & Sanchis-Marco, Lidia, 2024. "Forecasting the effect of extreme sea-level rise on financial market risk," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 1-27.
    • Handle: RePEc:eee:reveco:v:93:y:2024:i:pb:p:1-27
    DOI: 10.1016/j.iref.2024.03.079
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    More about this item

    Keywords

    Sea-level rise; Climate change; Extreme value theory; Forecasting; Financial market risk;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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