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A new framework for assessing climate change risk in financial markets

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Abstract

While there is growing recognition that climate change poses a new risk for the economy, more research is needed to understand how climate change risk affects global financial markets. We establish a new framework for this research by merging the climate change risk categories of physical risk, transition risk, and liability risk with the risk categories commonly assessed in the financial markets: market risk, credit risk, liquidity risk, and operational risk. We then factor in market structure and market regulation as we seek to assess the overall impact of these variables on systemic risk. Our framework shows that climate change affects each of the risk-management categories commonly assessed in the financial markets as well as the ways that they interact to generate broader systemic risk.

Suggested Citation

  • Nahiomy Alvarez & Alessandro Cocco & Ketan B. Patel, 2020. "A new framework for assessing climate change risk in financial markets," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue 448, pages 1-8, November.
    • Handle: RePEc:fip:fedhle:92324
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    Citations

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    Cited by:

    1. Sirkku Juhola & Anna‐Greta Laurila & Fanny Groundstroem & Johannes Klein, 2024. "Climate risks to the renewable energy sector: Assessment and adaptation within energy companies," Business Strategy and the Environment, Wiley Blackwell, vol. 33(3), pages 1906-1919, March.
    2. Bert Van Roosebeke & Ryan Defina, 2022. "Deposit Insurance in 2022: Global Trends and Key Emerging Issues," IADI Research Papers 22-02, International Association of Deposit Insurers.
    3. Bert Van Roosebeke & Ryan Defina, 2021. "Climate Change Fever: Can Deposit Insurers Stay Cool?," IADI Policy Briefs 5, International Association of Deposit Insurers.
    4. Afees A. Salisu & Christian Pierdzioch & Rangan Gupta & Reneé van Eyden, 2023. "Climate risks and U.S. stock‐market tail risks: A forecasting experiment using over a century of data," International Review of Finance, International Review of Finance Ltd., vol. 23(2), pages 228-244, June.

    More about this item

    Keywords

    Financial markets and the macro economy; international financial markets; Renewable Resources and Conservation; Climate; Natural Disasters and Their Management; Global Warming;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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